Chapter Questions
Which of the following are public goods: (a) the fire brigade, (b) clean streets, (c) refuse collection, (d) cable television, (e) social tolerance, $(\mathrm{f})$ the postal service?
How would you apply the principles of horizontal and vertical equity in deciding how much to tax two people, each capable of doing the same work, but one of whom chooses to devote more time to sunbathing and therefore has a lower income?
Classify the following taxes as progressive or regressive: (a) a higher tax on luxury goods than on necessities, (b) taxes in proportion to the value of owneroccupied houses, (c) a tax on beer, (d) a tax on champagne.
There is a flat-rate 30 per cent income tax on all income over $£ 2000$. Calculate the average tax rate (tax paid divided by income) at income levels of $£ 5000, £ 10$ 000 and $£ 50000$. Is the tax progressive? Is it more or less progressive if the exemption is raised from $£ 2000$ to $£ 5000 ?$
Common fallacies Why are these statements wrong? (a) If the government spends all its revenue, taxes are not a burden on society as a whole. (b) Taxes always distort markets. (c) Political economy is just an excuse to waffle, and cannot be made rigorous.
The lake of Mangrovia is polluted by a firm. A clean lake is considered a public good by the local community. Two residents, Sam and Ronald, are interested in reducing the level of pollution in the lake. The following table shows the marginal benefits (or marginal willingness to pay) of the two residents for each unit of pollution reduction:Suppose that the cost of reducing pollution is constant at $£ 19$. How much pollution would you expect to be reduced? What is the efficient amount of pollution reduction?
A firm that produces steel is polluting the air. Assume that the marginal cost of producing steel is constant at $£ 4$. The inverse market demand for steel is $P=44-$ $2 \mathrm{Q}$, where $P$ is the price of steel and $Q$ is the 1 quantity of steel. The air pollution associated with steel production is creating an externality given by $£ 2 \mathrm{Q}$.Assuming that the market for steel is competitive, what is the profit-maximizing level of steel when only marginal private costs are taken into account? The marginal social costs are given by the sum of the marginal private costs plus the externality. What is the social level of steel output? Show your solution graphically. What is the social loss associated with the externality? How can we solve this externality problem using taxation?
Why does society try to ensure that every child receives an education? Discuss the different ways this could be done and give reasons for preferring one method of providing such an education.
Hypothecation is the promise to use tax revenue from a product to achieve benefits for the group who bear the tax, for example using the London congestion charge to improve London's public transport or using tobacco taxes to build health centres for smokers. (a) Why are politicians attracted by hypothecation and (b) why are economists not attracted by hypothecation?
Suppose the local government of a city levies high taxes on its residents and does not provide them with enough public goods. What would the unsatisfied residents do according to the Tiebout model? What are the implications of the model on the city?
Tom, Dick and Harry vote for issues $\mathrm{A}$ and $\mathrm{B}$. Their votes are given in the table below. According to the simple majority rule, which issue will pass? Is there a chance of log-rolling among the voters? If there is, which issue will pass?
The market demand for milk is $Q^{D}=60-4 p$, while the market supply is $Q^{S}=p$ $+p$, where $p$ is the milk's price. Suppose that the government imposes a specific $\operatorname{tax} t=5$ on the suppliers of milk. Find the equilibrium in the milk market. Show your solution graphically. Calculate the total revenues generated by the tax.What proportion of the tax revenue is paid by consumers? What proportion ispaid by the suppliers? Explain graphically how those proportions may depend on the elasticity of demand.
(a) Suppose labour supply is completely inelastic. Show why there is no deadweight burden if wages are taxed. Who bears the incidence of the tax? (b) Now suppose labour supply is quite elastic. Show the area that is the deadweight burden of the tax. How much of the tax is ultimately borne by firms and how much by workers? (c) Refer to the graphs given below. In graph (i) the labour demand is elastic; in graph (ii) the labour demand is inelastic. In which graph does the tax burden fall to a greater extent on firms?
Essay question Imagine a new UK government, to the surprise of everyone, announces that income tax rates will rise by 15 percentage points in order to provide decent schools and hospitals. Describe the good and bad consequences. How did you decide what you meant by good and bad?