Unit 7: Public Spending Decisions

Question 1

Assuming equal shares between voters who are paying with a tax a tax to finance a public good. What is the total cost of the good?

Answer 1

C=ΣT(i) where T(i) is the cost to each voter, i

Question 2

Given 3 voters with individual MB valuations of public spending on a public good. Draw a diagram to illustrate the level of public good they desire, and explain it? Where will the equilibrium fall in this example and why? Show on the diagram the: a) forgone benefit, and b) loss, that voters may experience?

Answer 2

See notes for diagram

Since they have different marginal benefits, then for the fixed cost, T, to each voter, they demand a different level of the public good

See notes for equilibrium (MVT holds, status quo selected)

Question 3

See notes

Answer 3

just below the diagram

Question 4

If there is an increase in the tax rate, and the voters have MBs at different gradients, what might happen? Illustrate this on a diagram?

Answer 4

There may be a change in the identity of the median voter! (see notes for diagram) (and obvs. a change in the eq. level unless MB is vertical)

Question 5

Illustrate on a diagram how, if the tax rates rise for voter 2 and voter 3 but not voter 1, where T(3)>T(2), this might affect preferred level of PG for each person and how the median position could change?

Answer 5

See notes (bottom of side 1)

Question 6

What can a change in the structure/volume of taxes therefore do?

Answer 6

Change the identity of the MV

Question 7

The level of PG provided is not necessarily…

Answer 7

efficient or socially just

Question 8

What gives the efficient supply/volume of PG provision?

Answer 8

MB=MC (to society)

Question 9

Illustrate on a diagram that the MV does not necessarily choose efficient level of public spending? How might this be corrected?

Answer 9

See notes
Is corrected by reducing tax to T(L)=Lindahl tax share for the median voter; this aligns the interests of the median voter with that of society: see explanation in notes

Question 10

Show that the median voter who happens to have the AVERAGE MB will choose the efficient level of PG spending?

Answer 10

See notes side 2

Question 11

What is a common-pool problem?

Answer 11

A common-pool problem exists when everyone pays taxes, but a certain group (eg. the majority) determines the public spending in their OWN INTEREST

Question 12

Give an example when the CPP occurs?

Answer 12

When the median voter determines public spending; they are the only one satisfied (and any who have same preferences as them) -> over-/under-supply of PGs

Question 13

Note:

Answer 13

Majority voting/Condorcet winner do not necessarily lead to the selection of the most efficient outcome for Public Spending (see why slide 17?)

Question 14

Which market failures in education suggest we should intervene in education market? (3)

Answer 14

Externalities (positive, eg. wider benefits of educated citizens)
Imperfect information (on benefits of education etc.)
Imperfect competition

Question 15

Which social injustices in education suggest we should intervene in education market? (2)

Answer 15

Merit good argument

Horizontal and vertical equity considerations

Question 16

Characteristics of education as a market good?

Answer 16

1) private good (ie. excludable)
2) Is a consumption and an investment good
3) Often publicly financed and publicly provided
4) Heavy regulated
5) Not (fully) chosen by final consumer

Question 17

Explain why market failures in education leads to government intervention? (ie. why is it under-consumed in normal market? (2) and why cannot it be financed by individuals? (2…))

Answer 17

Positive externalities of education tf is under-consumed
Imperfect info on the benefits tf further under-consumed
- Individuals cannot finance own education since no income yet (at school still)
- Individuals cannot use own labour as collateral for a loan (slavery illegal)
THEREFORE FIs would charge too much compensation for an education loan since too risky
Therefore government must intervene to solve these issues!

Question 18

Define a merit good?

Answer 18

A good that will be under-consumed without government intervention

Question 19

What does the merit good argument justify for regarding gov. intervention in education?

Answer 19

Compulsion/regulation, but not necessarily entire public provision!

Question 20

What is an argument for public provision of education?

Answer 20

‘an educated citizen is a better citizen’

Question 21

What is redistribution?

Answer 21

Policy tool for goods that are needed proportionately most by the poor (eg. housing schemes)

NOTE: Redistribution motivation is often used as the main reason for the government to intervene in the education sector

Question 22

Some people argue that education is a redistribution policy. Explain two drawbacks of education that actually mean it isn’t so great?

Answer 22

1) High cost to increase equity by a small amount (ineffective)
2) Education policy can be manipulated by certain groups(???)

Question 23

Explain why some people argue that education is a redistribution motivation justifies public provision?

Answer 23

1) Asymmetrical info. evidence
2) Political acceptability
3) “an educated citizen is a better citizen”