Public Finance Review Questions, 2006-2007 Gary Galles 1. a) Briefly explain the major reasons Gwartney gave for why a system of well-defined ownership rights promotes economic progress. Contrast each of these with the expected results under communal property rights. b) What is Gwartney's response to the charge that private ownership unfairly favors the rich? c) Explain the biases Gwartney sees if government allocation were to replace market allocation of goods and services, and the likely effect on the poor. 2. a) Summarize the primary argument that Hayek makes against the possibility of optimal central planning (scientific socialism). b) What does Hayek see as the resultant primary advantage of market systems? What does this imply about the relative growth rates of technology in socialist countries versus market based economies? Why? c) What does Hayek's logic caution us against in the use of optimal intervention analyses of market failures? 3. a) How does the price system fare in terms of the criteria of efficiency, equity, paternalism and freedom? b) What could potentially justify a government program which moved society from an efficient allocation of resources to an inefficient one? c) How does the analysis of tax-free bonds illustrate the need to do positive economics well before applying value judgments in analyzing policies? 4. a) What is implied about government intervention if there exists a case of market failure? b) What principle tells us that a tax on gasoline may be an inefficient way to reduce pollution? c) Why aren't paternalistic people easily convinced by efficiency arguments? d) How is Henry Hazlitt's conclusion about the dominance of bad economics in politics a predictable consequence of rational voter ignorance? e) In discussing what to tax, one analyst wants to minimize the welfare cost of raising a given amount of revenue, and another's concern is raising a great deal of revenue from a given tax rate. Are they likely to agree on what kind of goods to tax? Why? 5. In what way is an argument that the government does too much income redistribution and argument that the government is underproviding an important public good? What is that public good? 6. a) What characteristics define a public good? b) What problem with public goods tends to lead to market failure? c) How does your answer to b) depend on the number of individuals involved and the similarity of their tastes for the public good? d) How, and how well, can government overcome the problem in b) above? e) If it became feasible to practice exclusion, should it be used? Explain. 7. a) How were British lighthouses able to privately finance the provision of the A public good @ provided by the lighthouses? b)
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