Jonathan Gruber Public Finance And Public Policy Pdf

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Public Finance and Public Policy

Questions and Problems 1. What is the relative price of a gallon of gas, in terms of bus trips? A commuter could exchange 2. One way to sketch a linear demand function is to find the x Q and y P intercepts. Price elasticity is the percent change in the quantity purchased divided by the percent change in price. To calculate these percentage changes, divide the change in each variable by its original value. Graph your budget constraint. The food intercept y in the accompanying figure is 25 units.

Suppose that the government subsidizes clothing such that each unit of clothing is half-price, up to the first 5 units of clothing. Graph your budget constraint in this circumstance. This budget constraint will have two different slopes. In other words, for less than 5 units of clothing, 1 unit of clothing costs the same as 1.

The point where the line kinks, 5, The new x-intercept clothing intercept is The theory of diminishing marginal utility predicts that the more people eat the less utility they gain from each additional unit consumed. The marginal price of an additional unit of food at an all-you-can-eat buffet is zero; rational consumers will eat only until their marginal utility gain from an additional bite is exactly zero.

The marginal cost of remaining at the buffet is the value of the time spent on the best alternative activity. When the marginal benefit of that activity is greater than the marginal benefit of remaining at the buffet, diners will leave. Consumers optimize their choice when they are on the highest possible indifference curve given their budget constraint. Under these circumstances, the budget constraint must pass through the indifference curve where it intersects the chosen point.

There must then be at least a segment of the budget constraint that lies above up and to the right of the indifference curve associated with that choice. Any choice on that segment would yield higher utility. The single tangency point C in the figure is the only point at which this occurs. Consider the utilitarian social welfare function and the Rawlsian social welfare function, the two social welfare functions described in this chapter.

Which one is more consistent with a government that redistributes from rich to poor? Which is more consistent with a government that does not do any redistribution from rich to poor? The Rawlsian social welfare function is consistent with redistribution from the rich to the poor whenever utility is increasing in wealth or income. The utilitarian social welfare function can also be consistent with a government that redistributes from the rich to the poor, for example, if utility depends only on wealth and exhibits diminishing marginal utility.

However, the Rawlsian social welfare function depends entirely on the least-well-off, so it will generally prescribe more redistribution than the utilitarian social welfare function. Think about your answer to part a. Show that government redistribution from rich to poor can still be consistent with either of the two social welfare functions.

If utility depends only on wealth and exhibits diminishing marginal utility, and if efficiency losses from redistribution are small, then both the utilitarian and Rawlsian social welfare functions can be consistent with government redistribution.

A simple example can illustrate this point. Because the free market competitive equilibrium maximizes social efficiency, why would the government ever intervene in an economy? Efficiency is not the only goal of government policy. Equity concerns induce government to intervene to help people living in poverty, even when there are efficiency losses.

In economic terms, a society that willingly redistributes resources has determined that it is willing to pay for or give up some efficiency in exchange for the benefit of living in a society that cares for those who have fewer resources.

Social welfare functions that reflect this willingness to pay for equity or preference for equity may be maximized when the government intervenes to redistribute resources. Draw the new budget constraint. The difference is that the all-leisure income is higher, but the slope of the line segment from hours of leisure to 2, hours of leisure is flatter.

A higher income guarantee with a higher reduction rate is more likely to discourage work for two reasons. First, not working at all yields a higher income. Draw a system of smooth indifference curves that bend the right way but would lead an agent to work more under the program you chose in part c than under the other program.

Describe what seems extreme about these curves that leads to the unusual behavior. This is odd behavior. Moreover, as the graph indicates, the part b system makes the worker richer leaving them with more money for any given amount of work less than 1, hours.

One would typically expect that making someone richer would also discourage work by making earnings less pressing and encouraging extra leisure. Economically speaking, this is happening because these indifference curves imply that leisure is an inferior good for this individual. Giving this individual more money is making them consume less leisure and therefore work more. And this inferior good effect is strong enough to outweigh the substitution effect coming from the lower effective wage in part c.

Such behavior is highly unlikely to happen in the real world. A good is called normal if a person consumes more of it when her income rises for example, she might see movies in theaters more often as her income rises. It is called inferior if a person consumes less of it when her income rises for example, she might be less inclined to buy a used car as her income rises. Sally eats out at the local burger joint quite frequently. The burger joint suddenly lowers its prices.

Suppose that, in response to the lower burger prices, Sally goes to the local pizza restaurant less often. Can you tell from this whether or not pizza is an inferior good for Sally?

You cannot. Since Sally eats at the burger joint quite a bit, falling burger prices imply that she is richer. If this was the only effect, you could indeed conclude that pizza is an inferior good—Sally gets richer and buys less pizza. But there is also a substitution effect here: the relative price of pizza has gone up.

This leads her to substitute away from pizza. If the substitution effect is bigger than the income effect for Sally, then she could respond in this way, even if pizza is a normal good. Suppose instead that, in response to the lower burger prices, Sally goes to the burger joint less often. Since she actually consumes less of them, the income effect must be working in the opposite direction, leading her to consume fewer burgers and it must be stronger than the substitution effect.

Since the fall of burger prices made Sally richer, burgers must be an inferior good for Sally. Note: A good for which falling prices leads to reduced consumption is known as a Giffen good. Giffen goods are observed in reality very rarely, if at all. Advanced Questions The government is considering altering the program to improve work incentives. Its proposal has two pieces.

Draw the budget constraint facing any worker under the original program. The budget constraint for the original program is depicted in the graph that follows. The budget constraint for the proposed program is depicted in the following graph. The original budget constraint is also depicted by the dashed line. At this point, she will be back onto the budget line that she would have been on, absent the guarantee program, just like under the old program.

Which of the four workers do you expect to work more under the new program? Who do you expect to work less? Are there any workers for whom you cannot tell if they will work more or less? Workers working fewer than hours see their hourly wage effectively doubled under the plan. The substitution effect therefore tends to make Alice, Bob, and Calvin all work more.

The income effect is thus different for these three workers. She consumes less of all normal goods, including leisure, so this also makes her work more. We can unambiguously conclude that she will work more. We can conclude from the substitution effect alone that he too will work more. He will therefore tend to work less due to the income effect. We cannot tell if the substitution effect or the income effect is stronger, so we cannot tell if Calvin will work more or less.

Finally, Deborah was working hours before. There is no substitution effect for her. As the graph shows, however, she experiences an increase in income. We conclude that she will work less. What is the value of consumer surplus? What is the value of producer surplus? The first step is to find the equilibrium price and quantity by setting quantity demanded equal to quantity supplied.

Recall that the condition for equilibrium is that it is the price at which these quantities are equal. This solves to What is the consumer surplus now? The producer surplus?

Why is there a deadweight loss associated with the subsidy, and what is the size of this loss?

Public finance

Questions and Problems 1. What is the relative price of a gallon of gas, in terms of bus trips? A commuter could exchange 2. One way to sketch a linear demand function is to find the x Q and y P intercepts. Price elasticity is the percent change in the quantity purchased divided by the percent change in price. To calculate these percentage changes, divide the change in each variable by its original value.

We are currently engaged in the most fundamental debate about the role of government in decades, and who better than Jonathan Gruber to guide students through the particulars in the new edition of his best-selling text, Public Finance and Public Policy, 6e. The new edition detail The new edition details ongoing policy debates, with special focus on the largest tax reform in 30 years. New topics include universal basic income, the legalization of pot, and congestion pricing. And, of course, there is an extensive, in-depth discussion of the debate over health care. The sixth edition delivers on all counts. Integrated Applications The Applications in this text allow students to step back from the main text and appreciate the policy relevance of the material.

Public finance is the study of the role of the government in the economy. Economist Jonathan Gruber has put forth a framework to assess the broad field of public finance. The proper role of government provides a starting point for the analysis of public finance. In theory, under certain circumstances, private markets will allocate goods and services among individuals efficiently in the sense that no waste occurs and that individual tastes are matching with the economy's productive abilities. If private markets were able to provide efficient outcomes and if the distribution of income were socially acceptable, then there would be little or no scope for government. In many cases, however, conditions for private market efficiency are violated.

the most fundamental changes in U.S. public policy over the past fifty years. Jonathan Gruber is a Professor of. Economics at arc2climate.org ().

Public Finance and Public Policy

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