PUBLIC FINANCE
Problem Set 1
1. Many states have language in their constitutions that requires the state to provide for an
“adequate” level of education spending. What is the economic rationale for such a
requirement?
2. Some goods and services are provided directly by the government, while others are funded
publicly but provided privately. What is the difference between these two mechanisms of
public financing? Why do you think the same government would use one approach
sometimes and the other approach at other times?
3. Why does redistribution cause efficiency losses? Why might society choose to redistribute
resources from one group to another when doing so reduces the overall size of the economic
pie?
4. One rationale for imposing taxes on alcohol consumption is that people who drink alcohol
impose negative spillovers on the rest of society—for example through loud and unruly
behavior or intoxicated driving. If this rationale is correct, in the absence of governmental
taxation, will people tend to consume too much, too little, or the right amount of alcohol?
5. In order to make college more affordable for students from families with fewer resources,
a government has proposed allowing the student of any family with less than $50,000 in
savings to attend public universities for free. Discuss the direct and possible indirect effects
of such a policy.
6. The country of Adventureland has two citizens, Bill and Ted. Bill has a private legal
business.
He earns $50 per hour. At a tax rate of 0%, Bill works 20 hours. At a 25% tax rate he works
only 16 hours, and at a 40% tax rate he works only 8 hours per week. Ted works a
manufacturing job. He works 20 hours per week and earns $6 per hour, regardless of the tax
rate. The government is considering imposing an income tax of either 25% or 40% on Bill
and using the revenues to make transfer payments to Ted. The accompanying table
summarizes the three possible policies. Does either tax policy raise social welfare? Are either
of the policies obviously less than optimal? Explain your answers.
7. Find the public debt of Viet Nam for the last 10 years? Describe its trend? What are your
concerns about our public debt?
8. What is an ageing population problem? Is Vietnamese population ageing? What are the
problems that an ageing population imposes on the economy?
9. Write a good question that you have about this topic. Since you may be asked to answer it
in class, so provide your answer as well.