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中央财经大学
《外国财政》习题
Chapter 1
1. Indicate whether each of the following statements is consistent with an organic or
mechanistic view of government:
a. “A strong state for Russians is not an anomaly, not something that must be fought against,
but on the contrary is … the initiator and main driving force of all change.”
b. “The highest end which the state can serve is to serve no end at all, but merely exist as a
means for the individuals within it to realize their own ends.”(Supreme Court Justice
William Rehnquist, in his master ‟s thesis for Stanford University.)
2. French law requires movie theaters to reserve 20 weeks of screen time per year for feature
films produced in France. The putative purpose is to reduce the number of US films shown
in France and hence reduce the US cultural influence there. How would you expect each of
the following to react to such a law?
a. someone with an organic conception of the state
b. a libertarian
c. a social democrat.
3. In each of the following circumstances, decide whether the impact of government on the
economy increases or decreases and why. In each case, how does your answer compare to
that given by standard measures of the size of government?
a. Normally, when employers offer health insurance benefits to their workers, these benefits
extend to the spouses of the workers as well. Several years ago, San Francisco passed a
law requiring firms that do business with the city to offer health and other benefits to
both same-and opposite-sex unwed partners.
b. The ratio of government purchases of goods and services to gross domestic product falls.
c. The federal budget is brought into balance by reducing grants-in-aid to state and local
governments.
4. During 2002, the inflation rate in the United Kingdom was about 2.1 percent. At the
beginning of that year, the national debt of the United Kingdom was about ￡311 billion.
Discuss the implications of these facts for measuring government revenues in that country
during 2002.
Chapter 2
1. Like economists, astronomers are generally unable to perform controlled experim ents. Yet
astronomy is considered more of an exact science than economics. Why?
2. In 2003, George W. Bush proposed a cut in marginal income tax rates. Explain why it is
difficult to predict the impact of such a tax cut upon labor supply on the basis of theory
alone. What kind of empirical work might help you in making a prediction?
3. MDMA is an illegal recreational drug commonly known as Ecstasy. The conventional
wisdom is that the use of Ecstasy leads to long-term problems such as nerve damage and
brain impairment. Recently, a scientist challenged this view, arguing that previous studies
had failed “to control for other factors, such as preexisting psychological complaints or
other drug use” (The Economist, September 7, 2002, p. 71). Relate the problems faced by
medical researchers trying to determine the long-term impact of Ecstasy to the problems
faced by economists trying to determine the effects of economic policy.
Chapter 3
1. From time to time, the city of Chicago provides free concerts. Can this program be
rationalized on the basis of welfare economics? Relate the program to the concept of merit
goods.
2. Your airplane crashes in the Pacific Ocean. You land on a desert island with one other
passenger. A box containing 100 little bags of peanuts also washes up on the island. The
peanuts are the only thing to eat.
In this economy with two people, one commodity, and no production, represent the
possible allocations in a diagram, and explain why every allocation is Pareto efficient. Is
every allocation fair?
. 3. According to Pope John Paul Ⅱ, “The social order will be all the more stable, the more…
it does not place in opposition personal interest and the interests of society as a whole, but
rather seeks ways to bring them into fruitful harmony.” Do markets constitute a good “social
order” according to this criterion? What is the relevance of the First Welfare Theorem to
your answer?
Chapter 4
1. Which of the following do you consider pure public goods ? Private goods ? Why ?
a. Wilderness areas
b. Municipal water supply
c. Medical school education
d. Public televis ion programs
e. An Internet site providing information on airplane schedules
2. In Spain, privet companies are finishing the beltway around madrid. The companies make
their money by charging tolls. Is a highway a public good? Is private provision of highway
a sensible idea?
3. In 1997, the state of Texas invited bids from private companies to administer the state‟s
entire welfare system. The Clinton administration told the Texans to halt the process,
arguing that welfare must be administered by government employees. Is welfare a public
good? Should it be publicly or privately produced? Relate your answer to the question of
whether or not this is a situation in which a relatively “complete contract” could be written
with a private sector firm.
4. It has been estimated that private prisons are about 10 percent cheaper, on a per prisoner
basis, than public prisons 「Hart, Shleifer, and Vishny, 1997」.On this basis, would you
recommend that prisons be privatized? If not, what other information would you require?
Chapter 5
1. The external costs of excessive alcohol consumption in the United States are estimated to
be about ＄1.19 per ounce. These costs are associated mainly with fatalities resulting from
drunk driving. Currently, taxes per ounce are about 27 cents for spirits, 13 cent for beer, and
12 cent for wine「Cutler, 2002,p.20」.Use our model of Pigouvian taxation to assess the
efficiency of this situation.
2. :
Discuss this excerpt from an editorial in the Albuquerque Journal「July 20,1991」It‟s one
of the more odious examples of the amorality of the marketplace : The Chicago Board of
Trade voted to create a private market for air pollution rights… It establishes a system by
which the depth of your neighborhood polluter‟s pocket will determine the necessities of his
cleanup, rather than the severity of his defiling of your air. The operation of this pollution
futures market will soon demonstrate the moral bankruptcy of this particular market
function 「p.A7」
3. In 1997, the government of the United Kingdom announced that, for the first time, students
would be required to pay part of the cost of their university education. A spokeswoman for
National Union of Students protested :“Free tuition is seen as a right ‥‥we‟ve always
been told 「that」if you choose to go on with your education, the state should pay because
you‟ll give so much back to the state by getting a better job and paying more in taxes ”
﹙Lyall, 1997, p. A7﹚.Comment on the validity of this assertion.
Chapter 6
1. It is estimated that in the midterm elections of 2002, in the state of California white voters
accounted for 76 percent of the voters although they comprised less than half of the state‟s
population. If these figures are correct, what does it tell us about the validity of the
predictions of the median voter theorem?
2. In 1998, the people of the Puerto Rico held a referendum in which there are five
choices — retain commonwealth status, become a state, become independent, “free
association” (a type of independence that would delegate certain powers to the United
States ), and “none of the above.”
Discuss the problems that can arise when people vote over five options.
3. Members of the European Union (EU) are required to keep their deficits below 3 percent of
Gross Domestic. Countries that violate the rule can face huge fines. O n the basis of the
U.S. experience with the Budget Enforcement Act of 1990, how effective would you predict
the EU deficit limits to be? What kind of behavior would you expect to see EU countries
exhibit?
4. The discussion of rent-seeking in this chapter noted that peanuts cannot be grown without
licenses. The licenses can be sold to non-farmers., and in fact, many of then are currently
owned by firms that have nothing to do with farming, such as insurance companies. Does this
fact affect your view of whether or not it would be fair to eliminate the system of licenses for
peanut farming? Include in your answer a discussion of the price that owners of the licenses
have to pay for them.
Chapter 7
1. Suppose that the government requires employers to provide day care centers for their
workers. Suppose further that the market value of the day care center provided by a
particular employer is ＄5,000 per year. Can we conclude that an employee who takes
advantage of the day care center is better off by ＄5,000 per year?(Hint: Analyze a model
in which the individual chooses between two commodities, “hours of days care” and “all
other goods.”)
2. Consider the following government programs:
a. Giving a laptop computer to every seventh grader.
b. Providing free after-school programs for children from impoverished families.
How might each program affect the distribution of income?
3. Consider the model of an in-kind transfer in Figure 7.2. Suppose that it is illegal for a
recipient of the cheese to sell it. Nevertheless, there is a black market, where cheese can be
sold for＄1 per pound. Show how the existence of the black marker affects the individual‟s
budget constraint. Does it make her better off?
Chapter 8
1. Suppose you wanted to conduct an econometric study of the impact of job-training
programs on future earnings. What data would you need?
2. Discuss: “Workfare is an efficient way to transfer income if the quantity of leisure
consumes by the recipient appears in the utility function of the donor.” [Hint: Consider the
theory of externalities.]
3. Food stamp benefits are phased out in a complicated fashion that varies from state to state.
However, an some point near the poverty line, food stamps worth about ＄1,250 are
suddenly lost. Ignoring other aspects of the tax and transfer system, sketch the
income-leisure budget constraint associated with this provision. (Don‟t worry about the
specific slope and intercept of the constraint; just sketch the general shape.)
4. In the analysis of TANF‟s work incentives in Figure 8.4, the individual continues to work
while receiving welfare. Reproduce the budget constraint from that figure, and sketch a set
of indifference curves for an individual who would choose not to work while receiving
welfare benefits.
Chapter 9
1. Dicuss the relationship between the following two statements(a)Social Security benefits are
partially subject to the personal income tax, but only for recipients whose other sources of
income exceed certain limits.(b)Social Security is social insurance, not welfare; therefore it is
not means-tested.
2. In her novel Sense and Sensibility, Jane Austen wrote,” If you observe, people always live
forever when there is any annuity to be paid them.” Relate this quotation to the issue of
adverse selection in annuity markets.
3. Discuss:” Over the long term, the rate of return to stocks is greater than the rate of return to
government bonds. Therefore, it would be easier to care for future retires if the Social Security
trust fund were invested in stocks rather than government bonds.”
4. According to the calculations of Diamond and Gruber {2001, p.456}, if a male decides to
work he is 68 and then retire when he is 69, the effect of the extra year of work at age 68 is
to charge his Social Security wealth from $95,964 to $ 91,131.Is the adjustment to future
benefits when an individual of this age defers retirement by a year actuarially fair? Explain.
Chapter 10
1. In 1994 the state of Tennessee created a program to provide health insurance to cover all
people who could not afford health insurance or were too ill to qualify for private
insurance .By 1999, the costs of the program had grown so much that the state began cutting
benefits, tightening eligibility, and cutting its payments to physicians and HMOs. Use Figure
10.1 o explains why this outcome was predictable. Some observers suggest that a major
miscalculation was the expectation that enrolling many of the beneficiaries would lead to
major cost reductions, which did not materialize. What theory might explain the failure of
HMOs to contain long-run health care costs?
2. Some have suggested that if a prescription drug benefit is made part of Medicare, then
individuals must make a decision about whether or not to accept it when they enter the
Medicare system, and stick to that decision permanently. That is, individuals either accept the
prescription program and begin paying premiums as soon as they become eligible, or they
can never enter the program. Explain the efficiency rationale behind this proposal.
Chapter 11
1. „If you were running the government, would you ask whether it would be cost-effective to
make children‟s pajamas flame-resistant., or would you just order the manufactures to do it?
Would you be moved by the pleas of crib manufactures who told you it would cost them a
bundle to move those slats closer together? ” {Herbert, 1995} How would respond to these
questions?
2. New Jersey recently instituted an enhanced auto emissions testing system at inspection sites
throughout the state. According to news reports .the new tests increased waiting times from
about 15 minutes to 2 hours. How should this observation be factored into a cost-benefit
analys is of the emissions testing program?
3. In a journalist‟s discussion of the costs and benefits of recycling in New York, the first
benefit he listed was that recycling created about 1,000 jobs in the private sector. Discuss
the logic of this statement.
4. According to Currie and Gruber, the expansions of Medicaid in the 1980s led to a decline
in child mortality of 5.1 percent. They calculate that the cost of the expansion per life saved
was about $1.6 million. How would you determine whether or not the Medicaid expansion
passed a cost-benefit test?
Chapter 12
1. According to estimates by Goolsbee [1998], purchases on the Internet are highly sensitive to
tax rates, and applying existing sales taxes to such purchases would substantially reduce the
number of online buyers and the amount of online spending. What are the implications for
the incidence of a tax levied on Internet sales?
2. Use a general equilibrium framework to discuss the possible incidence of a tax on cigarettes.
3. In 2003, Senate4 Democrats proposed a tax reform that would reduce taxes for all workers
by $300.For simplicity, assume that there is one earner per family, so each family would get
a $300 reduction in its taxes. Use Equations and to discuss how this proposal would affect
the progressiveness of the tax system.
Chapter 13
1. Under legislation passed in 2001, the marginal tax rate on the wages of individuals in the
highest income category (over a million dollars annually) will decrease from 39.3 percent to
34.0 percent. Use Equation to approximate the proportion by which this change will reduce
the excess burden on individual in this income group.
2. “In the formula for excess burden given in Equation, the tax is less than one .When it is
2
squared, the result is smaller, not bigger. Thus having t instead t in the formula makes the
tax less important.” Comment.
3 In the United Kingdom, each household that owns a television pays a compulsory levy that
is equivalent to $160 per year. Do you think that such a tax is likely to have a substantial
excess burden relative to the revenues collected?
3. Because of federal subsidies, “the price of corn ($2.25 a bushel ) is 50 cents less than the
cost of growing it ”.Use a model along the lines of Figure 13.6 to model this situation ,and
show the excess burden of the subsidy.
Chapter 14
1. In 2002, the US federal government levied a tax of 3 percent on that part of a car ‟s price
exceeding $40,000.(For example ,the tax liability on a $50,000 car would be 0.03 ×
($50,000-40,000),or $300.) Discuss the efficiency, equity, and administrability of this
“luxury car tax.”
2. Suppose that Sharlene faces a marginal income tax rate of 36 percent, and if she cheats on
her taxes, there is a percent chance that she will be caught. Use the logic surrounding Figure
14.5 to compute the smallest fine that will induce Sharlene not to cheat.
3. Real estate magnate Donald Trump once proposed a one-time tax of 14.25 percent on the net
wealth of every American with more than $10 million. Would this be an efficient way to raise
tax revenue? Include in your answer the concept of the “time inconsistency of optimal
policy.”
Chapter 15
1. In 1997, House Republicans proposed that capital gains be indexed for inflation .Newsweek‟s
Wall Street editor stated that this was unfair to wage earners:” Inflation pushes up salaries,
too. But would paychecks get the same generous treatment? Nope. No inflation indexing”
Compose a letter to Newsweek in which you comment on this statement.
2. Austin‟s marginal tax rate is 30 percent and he itemizes his tax deductions .How much is a
$500 deductions. How much is a $500 deduction worth to him? How much is a $500 tax credit
worth to him?
3. Two alternative proposals have been made for dealing with the marriage tax: 1) lower the tax
rate on the earning of the spouse with lower earnings, perhaps by allowing the family to
deduct 10 percent of the earnings of that spouse ,or 2) increase the standard deduction for
married couples .From the point of view of enhancing economic efficiency, which proposal is
better? Explain your answer.
Chapter 16
1. „I promise to lower income tax rates. And I won‟t have to cut spending, because the lower
rates will induce so much economic activity that tax revenues will rise.‟ Would this promise
be more credible coming from a candidate for president or a candidate for governor of your
state?
2. Suppose that individuals view their loss of income from income taxes as offset by the
benefits of public services purchased with the revenues. How are their labor supply decisions
affected? (Hint: Decompose the change in hours worked into income and substitution
effects.)
3. The tax law passed in 2001 will eventually lower the top marginal income tax rate from 3
9.6 percent to 35 percent. What impact do you expect this law to have on labor supply, saving,
and tax revenues?
Chapter 17
1. „Small corporations should face lower tax rates than large businesses, just as individuals
with low incomes should face lower income tax rates than those with high incomes.‟ What
view of the corporation is implicit in this statement? Contrast this view with the view of
conventional economics.
2. In 2000, Germany introduced a major tax reform. Under the new law, corporations pay a
rate of 25 percent on retained earnings and 30 percent on earnings that are distributed to
shareholders .Further, under the personal income tax; dividends are taxed at half the rate of
ordinary income. Does this law make sense from the standpoint of the Haig-Simons
definition of income?
3. Before former Treasury Secretary Paul H. O‟Neill had that job in the government, he was the
chief executive of Alcoa, the leading manufacturer of aluminum. He said, “As a businessman I
never made an investment decision based on the tax code.” If O „Neill meant what he said,
how would you react to it if you had owned stock in Alcoa while he was in charge?
