pubsec-ansps1

# pubsec-ansps1 - BRANDEISU NIVERSITY Departmentf E conomcs o...

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Economics 134 Public Sector Mr. Coiner Spring, 2009 I . Chapter l, Question 9. The first tax policy, with a rate of 25%o, MAY raise social welfare. Although the total amount of income available to the 2 people falls from \$1 120 to \$920, indicating a decrease in efficiency, it does represent an improvement in equity. Without a social welfare function, we can't tell whether society is better or worse off. The second tax policy MAY raise social welfare compared with the original distribution (a Rawlsian would prefer it, because the lowest income is \$240, not \$120), butthe tax rate of 40%o is clearly inferior tothe25oh rate, because each person is worse off under the 40o/orate. 2. Chapter 2, 3. See drawing on page 3. 3. Chapter 8. See drawing on page 3. Also, a) The person can have complete leisure (2000 hours) and \$6,000. This is point A. Starting from A, if she begins to work, at first each hour of work raises her income by \$4 (she gets paid \$8, but the government reduces transfer payment by \$4, so she only nets 4 extra dollars). This continues until she is working 1500 hours, getting 500 hours of leisure (point B). At that point, she is getting nothing from the government. If she decides to work even more hours. she now gets to keep full \$8 she is paid). The slope ofthe budget line to the left of B is -\$8. b) Same idea as part a, but now she received \$9,000 for not working at all (point D). As she begins work, at first each hour of work raises income by only \$2 (she earns \$8, but the government transfer payment by \$6). Again, once she is working | 500 hours, her govemment is zero, and her is \$8( 1500) : \$ 12,000 (point B once again). From that point on. if she works more, she keeps all \$8. c) Comparing the parts of the budget lines that differ (AB vs DB), the second plan (line DB) is more likely to discourage work. In terms

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## This note was uploaded on 10/15/2011 for the course ECON 134 taught by Professor Coiner during the Spring '11 term at Brandeis.

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pubsec-ansps1 - BRANDEISU NIVERSITY Departmentf E conomcs o...

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