Public Sector Economics

First Homework Assignment

Due Friday, January 22 at the beginning of class.

(20 pts.)

Directions:  Copy and paste this into a word document and then type your answers.  Answers not typed will not be graded.

NOTE for all homework assignments:  Never copy and paste from the handouts or the internet for an answer!  Use your own words.  Also - leave the questions - do not delete them.

1.   The city council has asked you, an economist, to do an analysis of a change in a rule they are considering.  They are thinking about earmarking 1% of a 4% city sales tax (right now assume the entire 4% goes into a general fund and is not earmarked for any particular purpose).  The entire 4% tax is up for a renewal vote in one year but they want the change to be effective immediately. (Earmarked means the revenue raised from that 1% tax will go to a specific purpose - I deliberately did not tell you the purpose, so you might want to think about that in your answer).

       a.  They want you to provide a public finance explanation of how this change might effect people's behavior and why? Hint:  provide two ways by which people might change their actions in response to this new rule. State any assumptions you make. (4 pts.)

       b.  They want you to provide a public choice explanation of how this change might effect people's behavior and why. Hint:  provide two ways by which people might change their actions in response to this new rule.  State any assumptions you make.  (4 pts.)

2.  Bob is both a consumer and a voter.  Explain one similarity and one difference Bob might encounter when comparing Bob buying a car in the market with Bob voting for a new law that requires people to wear seat belts.  (6 pts.)

      3.  Provide an argument for the idea that government should provide a good or service -- then give a counter-argument to your argument.  (6 pts.)