CLASS / COURSE: Public Sector Economics

QUESTION DESCRIPTION:

 

Exam 1

Public Sector Economics

Summer Semester

 

Part I: Answer any 3 of the following 5 questions. Your answer should clearly indicate whether a given statement is true, false, or uncertain, and you should write a paragraph or two defending your answer. (20 points each; 60 points total)

1.     The 1^st fundamental theorem of welfare economics provides a rationale for laissez-faire economics. In your answer, you may want to include a clear statement of the theorem and explain what economists mean by laissez-faire economics.

2.     In a perfectly competitive, private goods economy, there is no role for government.

3.     Suppose that there are 12 bottles of cold beer and 9 hot slices of pepperoni pizza that need to be divided between 3 people. After some thought, the host divides beer and pizza equally among her two guests and herself. In other words, each person gets 4 bottles of beer and 3 slices of pizza. This is a Pareto efficient allocation.

4.     Suppose that the equilibrium market prices of food and clothing per unit is $5 and $10, respectively. John and Sally’s marginal rates of substitution for food and clothing are both equal to ¼. This is a Pareto optimal allocation of food and clothing between John and Sally because their marginal rates of substitutions are equal.

5.     A Pareto efficient allocation is the best way to distribute resources.

Part II: Complete the following table. I obtained the information for fiscal year 2006 from page 34 of your textbook. The information for fiscal year 2011 should be available in the FY 2011 Budget of the United States (http://www.gpoaccess.gov/usbudget/fy11/spec.html). Most of the information should be available from PDF file 26-14 Current Services Budget Authority and Outlays by Function, Category, and Program.

After completing the table, briefly describe any trends in federal government expenditures that you observe in this table. Due to inflation, it may be more revealing to discuss trends in terms of percent by subcategory. Also, discuss whether federal expenditures appear to target market failures. A well-known economist at MIT, Professor John Grubert, contends that a growing share of federal government expenditures is going to providing “insurance” to individuals. Based on the evidence in the table, discuss this observation. Can market failures be used to justify the federal government providing “insurance-like” products to individuals or should this be left to the private sector?

(40 points)

 

Expenditures by the federal government of the United States, in FY 2006 and FY 2010

 

Category	FY 2006		FY 2010
	$ (billions)	Percent of subcategory	$ (billions)	Percent of subcategory
Expenditures on goods and services	$679	26
Defense spending	$576	85
Non-defense spending	103	15
Domestic transfers to persons	1,315	50
Social insurance
Social security benefits	549	42
Medicare	376	29
Civilian and military retirement	99	9
Unemployment insurance	32	2
Agricultural support payments	21	2
Veterans benefits	64	5
Public assistance
Food stamps	30	2
Housing Assistance	32	2
Supplemental security income	34	3
Earned income tax credit	36	3
Net interest payments	227	9
Grants-in-aid	434	16
Payments to individuals	277	64
TANF	21	8
Medicaid	181	65
Other	157	36
Total Expenditures	2,655	100

Instructions

 

SOLUTION DESCRIPTION: Completed Solution is attached. Click on Buy button and then download file to get full solution.

SUBJECTS / CATEGORIES:
1. Business Economics
2. Economics

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