Chapter9—PublicSectorandPublicChoice
TRUE/FALSE
1. GovernmentspendingasapercentageofGDPhaschangedlittlesince1970,butthecompositionofgovernmentspendinghaschangedconsiderably.
ANS: T PTS: 1
2. Thecompositionofstateandlocalspendingisdifferentfromthatoffederalspending.
ANS: T PTS: 1
3. Alargemajorityofgovernmentactivityisfinancedbyborrowing.
ANS: F PTS: 1
4. NeitherthecompositionofU.S.federalgovernmentspendingnoritsshareofGDPhaschangedmuchsince1970.
ANS: T PTS: 1
5. TaxpayersinotherpartsofthedevelopedworldhaveheaviertaxburdensthanthoseintheUnitedStates.
ANS: F PTS: 1
6. Taxesongasoline,liquor,andtobaccoproductsprovideasubstantialportionoffederaltaxrevenues.
ANS: T PTS: 1
7. TheshareoffederaltaxesgoingtoSocialSecurityandMedicarehasrisensignificantlyinrecentyears.
ANS: T PTS: 1
8. Mostothercountriesrelylessheavilyonincome-basedtaxesthantheUnitedStates.
ANS: F PTS: 1
9. Ifahigher-incomepersonpaysmoreintotaltaxesthanalower-incomeperson,thosetaxeswouldbeconsideredprogressive.
ANS: F PTS: 1
10. Excisetaxes,suchasthoseonalcohol,tobacco,andgasoline,tendtobethemostregressivetaxes.
ANS: T PTS: 1
11. Excisetaxescanleadtoeconomicinefficiency.
ANS: T PTS: 1
12. Alargershareofstateandlocalgovernmentrevenuesarefromthefederalgovernmentingrantsthanfromstateandlocalpersonalandcorporateincometaxes.
ANS: T PTS: 1
13. Forthemostparttaxesareinefficientbecausetheychangeincentivesandalterthetruevaluebuyersandsellersplaceongoodsandservices.
ANS: T PTS: 1
14. Mosttaxesprovideincentivesforindividualstoworkhard,save,andinvest.
ANS: F PTS: 1
15. Theabilitytopayprinciplestatesthatthosewiththeleastabilitytopaytaxesshouldpaymorethanthosewiththegreatestabilitytopaytaxes.
ANS: F PTS: 1
16. Thegasolinetaxisagoodexampleofthebenefitsreceivedprinciple.
ANS: T PTS: 1
17. Inpublicchoiceanalysis,bureaucrats,politicians,andvotersareassumedtomakechoicesthattheybelievewillyieldtothepublicexpectedmarginalbenefitsgreaterthantheirexpectedmarginalcosts.
ANS: T PTS: 1
18. Scarcityandcompetitionarepresentinthepublicsectoraswellasintheprivatesector.
ANS: T PTS: 1
19. Theindividualconsumption-paymentlinkbreaksdownwhengoodsaredecidedonbymajorityrule.
ANS: F PTS: 1
20. Themedianvoterresultimpliesthatwhenthosewithextremepoliticalviewsbecomemoreextreme,itwillhavealargeeffectonthemajorityvotingoutcome.
ANS: T PTS: 1
21. ThemajorityofAmericanscannotidentifytheircongressionalrepresentatives.
ANS: F PTS: 1
22. Thebenefitsofcastingawell-informedvotearegenerallyfargreaterthanthecostofdoingsoformostvoters.
ANS: T PTS: 1
23. Anelectionthatisexpectedtobeclosewouldtendtoincreasevoterturnout.
ANS: F PTS: 1
MULTIPLECHOICE
1. Whichofthefollowingareimportantrolesofthegovernment?
a. protectingpropertyrights b. providingalegalsystem c. interventionwheninsufficientcompetitionoccursinthemarketplace d. promotingstabilityandeconomicgrowth e. alloftheabove
ANS: E PTS: 1
2. SocialSecurityandMedicarearefinancedby
a. personalincometaxes. b. payrolltaxes. c. excisetaxes. d. corporationincometaxes. e. noneoftheabovetaxes.
ANS: C PTS: 1
3. WhomustlegallypaySocialSecurityandMedicaretaxes?
a. employers b. employees c. bothemployersandemployees d. neitheremployersnoremployees
ANS: A PTS: 1
4. Expenditureson____comprisethelargestcomponentofstateandlocalgovernmentbudgets.
a. education b. publicsafety c. publicinfrastructure(suchasroadsandwaterworks) d. publicwelfare(suchasfoodstampsandincomesupplementalprograms)
ANS: A PTS: 1
5. ____taxesaredesignedtotakealargerpercentageofhighincomesascomparedtolowerincomes.
a. Progressive b. Regressive c. Proportional d. Negative
ANS: A PTS: 1
6. Anexampleofaproportionaltaxwouldbe
a. astatesalestax. b. alocalpropertytax. c. aflatrateincometax. d. thecurrentU.S.incometax.
ANS: C PTS: 1
7. Thelargestsinglesourceofrevenueforthefederalgovernmentisthe
a. corporateincometax. b. federalexcisetax. c. personalincometax. d. SocialSecuritytax.
ANS: C PTS: 1
8. Whichisthelargestsinglecomponentoffederalexpenditures?
a. interestonthenationaldebt b. defensespending c. SocialSecurity d. foreignaid
ANS: C PTS: 1
9. TheU.S.federalincometaxisanexampleofa
a. progressivetax. b. proportionaltax. c. regressivetax. d. value-addedtax.
ANS: A PTS: 1
10. Thegasolinetaxisanexampleof
a. progressivetaxation. b. neutraltaxation. c. proportionaltaxation. d. regressivetaxation.
ANS: D PTS: 1
11. Theabilitytopayprinciplestates:
a. Thosewiththegreatestabilitytopaytaxesshouldpaymore. b. Thosewiththeleastabilitytopaytaxesshouldpaymore. c. Individualsreceivingthebenefitsshouldpayforthem. d. Alloftheabovearetrue.
ANS: A PTS: 1
12. Theamountofinformationthatisnecessarytomakeanefficientchoiceisgenerallyinthepublicsectorthanintheprivatesector.
a. less b. more c. thesame d. Noneoftheaboveistrue.
ANS: B PTS: 1
13. Voterswilltendtobeinformedabouttheirpoliticalchoicesthantheirprivatemarketchoices,otherthingsbeingequal.
a. more b. equally c. less d. Anyoftheaboveareequallylikelytobetrue.
ANS: A PTS: 1
14. Themedianvoterresultimpliesthat
a. electionswilloftenbeveryclose. b. electionswillusuallybelandslidesforthesamepartyyearafteryear. c. electionswillusuallybelandslides,withvictoriesalternatingbetweenpartieseachyear. d. whenthepreferencesofmostvoterschangesubstantially,winningpoliticalpositionswillalsotendtochange. e. bothaanddaretrue.
ANS: B PTS: 1
15. Foravotertobecomemoreinformedonapoliticalissueislikelytohavebenefitsandcoststhanforsimilarmarketdecisions,otherthingsbeingequal.
a. smaller;larger b. smaller;smaller c. larger;larger d. larger;smaller
ANS: A PTS: 1
16. Whichofthefollowingwouldtendtoraisevoterturnout?
a. ablizzardorheavyrainstormonelectionday b. anelectionthatisexpectedtobealandslide c. thelongerthewaitisexpectedtobeatthevotinglocations d. afeelingthatthecandidatesarebasicallyrunningonthesameplatforms e. Noneoftheabovewouldtendtoraisevoterturnout.
ANS: D PTS: 1
17. Iftherearefarfewersugargrowersthansugarconsumers,
a. thegrowersarelikelytobemoreinformedandinfluentialonpolicythanvoters. b. theconsumersarelikelytobemoreinformedandinfluentialonpolicythanvoters. c. individualsugargrowersarelikelytohavemoreatstakethanindividualsugarconsumers. d. individualsugarconsumersarelikelytohavemoreatstakethanindividualsugargrowers. e. aislikelytobetruebecausecislikelytobetrue.
ANS: B PTS: 1
PROBLEM
1. Whyareincometaxesmoreprogressivethanexcisetaxessuchasthoseonalcohol,tobacco,andgasoline?
ANS:
Ataxisprogressivewhenittakesalargerpercentageofincomeathigherlevelsofincome.Theincometax,withhighermarginaltaxratesforthosewithhigherincomes,isthereforeprogressive.Ataxisregressivewhenittakesalargerpercentageofincomeatlowerlevelsofincome.Excisetaxesareproportionaltotheamountspentonthetaxeditem.Butlowerincomepersonsspendalargerportionoftheirincomesonalcohol,tobacco,andgasolinethanhigherincomepersons,makingthoseexcisetaxesregressivewithregardtoincome.
PTS: 1
2. WhyistheSocialSecuritypayrolltaxconsideredregressive?
ANS:
TheSocialSecuritytaxisproportionaltoearningsuptoaceilinglevelofearnings,thenzeroforearningsbeyondthatlevel.Thismeansittakesasmallerpercentageofearningsforthosebeyondtheceilinglevel,makingitregressiveforthatincomerange.Further,laborearningsareasmallerproportionoftotalincomeforhigherincomepeoplethanlowerincomepeople.
PTS: 1
3. SupposeaproportionaltaxsystemthateliminatedalldeductionsandtaxsheltersreplacedthecurrentU.S.taxcode.Howwouldtheincentivetoengageintaxavoidancechange?Whatabouttheincentivetowork?(Onwhatmightanychangedepend?)Explain.
ANS:
Ifanewtaxsystemeliminatedalldeductionsandtaxshelters,therewouldbefeweropportunitiestoengageintaxavoidance,reducingtheincentivetoengageinsuchbehavior.Theincentivetoworkbyaparticularindividualcouldeitherincreaseordecrease,dependingonwhetherone''smarginaltaxrateswerehigherorlowerafterthechangeinthetaxcode.
PTS: 1
4. Illustratethemedianvotermodelgraphicallyandexplainit.
ANS:
Inatwo-partysystem,thecandidatewiththemostvoteswinstheelection.Asuccessfulcampaignwouldhavetoaddresstheconcernsofthemedianvoters(thoseinthemiddleofthedistribution),resultinginmoderatepolicies,becausethecandidatethattakesthemedianpositionislesslikelytobedefeated.Thesuccessfulcandidatewillstillseekoutthemedianvoters.Infact,themedianvotermodelpredictstherewillbeastrongtendencyforbothcandidatestopickapositioninthemiddleofdistribution,andthereforetheelectionwillbeveryclose.
PTS: 1
5. Whyarecollegestudentsbetterinformedabouttheirownteachers’andschools’policiesthanaboutnationaleducationissues?
ANS:
Students’knowledgeofteacherandschoolpoliciesallowthemtomakebetterchoicesforthemselves,soitisrationalforthemtobeinformedinthoseareas.However,sinceitisfarmorecostlytobecomeinformedonnationaleducationalissuesandtheirvotewillnotchangethoseoutcomes,itisrationalforthemtoberelativelymoreignorantaboutthem.
PTS: 1
6. Howcanyoubeforcedtopayforsomethingyoudonotwantto“buy”inthepoliticalsector?Isthissometimesgood?
ANS:
Itisrationalinthelargegrouppublicgoodcaseforpeoplenottovoluntarilycontributetothecostofprovidingit.Thegovernmentcanusecoerciontoovercomepeople’sunwillingnesstopay,byforcingthemtopaytaxesorfees.Thiscanbegood,inthatitcanovercomethetendencytoprovidelessthantheefficientamountofpublicgoodsintheabsenceofsuchcoercion.
PTS: 1
7. Whydoyouthinknewsreportersaremoreinformedthanaveragecitizensaboutpublicpolicyissues?
ANS:
Sincereportershavejobsthatinvolvebeinginformed,theyhaveafargreaterincentivetobeinformedthanthosewhosejobsdonotsimilarlyinvolvesuchinformation.Sincetheirprivatelycapturedbenefitsaregreaterthanformostpeople,wewouldexpectthemtobemoreinformedthanaveragecitizens.
PTS: 1
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