Study Questions For The First Exam
Public Sector Economics
READ: These questions are not designed to take the place of studying your notes and the reading assignments. Do not e-mail me and ask me to answer all or some of these questions for you. If you have missed class, it is your responsibility to get the notes from another student. Once you have answered these questions yourself, if you are unsure of any of your answers, let me know and I will tell you if you are correct or not. Don't be afraid to ask me questions, I just want you to try to answer the questions yourself first. Make sure you have done all of the reading assigned. Also, pay attention to the homework questions and the exercises we have done in class.
Make sure you study the in class exercises, the homework, the readings and, of course, the notes!
Topic: Public Finance and Public Choice - Introduction
Economists basically study rules or institutions. Why?
Explain a difference between the standard study of Public Finance and the study of Public Choice. Include in your answer the different roles/decisions people make as studied under both Public Finance and Public Choice.
What basic assumption do Public Choice economists make (regarding politicians, bureaucrats, etc.).
Economists have studied how resources are allocated through the market process -- and are now studying how resources are allocated through the political process. Both processes are seen as orders instead of organizations, what does that mean?
What does a "Pareto Optimal Move" mean? How does it relate to welfare economics? What other measures of "efficiency" do standard economists use?
What is the basic problem with applying the standard measures of efficiency?
What does subjective value theory say about the ability to actually use welfare economics in the "real world."
What can economists do then, if they understand that costs and benefits cannot be measured? Examples?
Topic: Arguments for Government Provision of Goods
How did Mitchell and Simmons (your reading) define "market failure"?
What are the six "justifications" for government provision of goods that we discussed (make sure you know the argument or theory for each) and the counter-arguments that we discussed in class? Explain why you might agree or disagree with the justification (that is, do you think they do justify the government provision of goods or not and why). The following questions relate to this question:
What is an externality? Positive? Negative? Examples?
How does free riding relate to an externality?
When discussing externalities, economists talk about internalizing the externality? What does that mean?
Another way of discussing internalizing is to talk about making social costs = private costs. Explain both in words and graphically.
What is the economist's technical definition of a public good?
What does nonrival mean?
What does nonexclusive or nonexcludable mean?
What's the theory behind the idea that markets will not provide the efficient amount of a public good?
Even if a good has both characteristics (as above) - why might a private firm still provide it (as history has shown)?
If the government does provide a "public good" - will there still be free riding (most likely)? Why - explain? What other problems does government face when trying to provide the "right" amount of a "public good"?
What are the two concepts of competition we talked about in class and the policy implications that follow?
What are two ways by which "inequality" might come about in society (that we discussed).
What are some problems with government trying to make us all "equal?"