[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

4. How do tax and redistribution programs affect incentives?
How do social insurance programs affect incentives?
Describe some of the trade-offs involved.
5. How can redistribution take place through an entitlement
program like Social Security, to which all workers
contribute and from which all retirees receive benefits?
6. What are some of the major controversies in the realm
of policy and public-sector economics?
PROBLEMS
1. In each of the following areas, specify how the government
is involved, either as a direct producer, a regulator,
a purchaser of final goods and services distributed
directly to individuals or used within government, or in
some other role.
(a) Education
(b) Mail delivery
(c) Housing
(d) Air travel
(e) National defense
In each of these cases, think of ways that part of the
public role could be provided by the private sector.
2. Assume that a country has a simple tax structure, in
which all income over $10,000 is taxed at 20 percent.
Evaluate a proposal to increase the progressivity of the
tax structure by requiring all those with incomes over
$100,000 to pay a tax of 80 percent on income in excess
of $100,000. Draw a high-wage earner’s budget constraint.
How does the surtax affect her budget constraint?
What happens to her incentives to work? Is it possible
that imposing the tax actually will reduce the tax
revenues the government receives from the rich?
3. Imagine that Congress decided to fund an increase in
Social Security benefits by increasing the payroll tax on
employers. Would this prevent employees from being
affected by the higher tax? Draw a diagram to illustrate
your answer.
4. Consider an individual contemplating whether to quit
her job and go on welfare. How might the fact that welfare
is time limited affect her decision? Is it possible that
time-limited welfare may not only lead people to leave
welfare but also reduce the number who go on welfare?
5. The president is trying to decide which of three goals he
should put at the top of his agenda—Social Security
reform (s), a middle-class tax cut (m), and preserving
the safety net for the poor (p). He puts the matter before
his advisers in three separate meetings. Assume he has
three advisers, and he takes a vote in each meeting. His
political adviser’s ranking is {m-s-p}, his economic
adviser’s ranking is {s-p-m}, and his health care
adviser’s ranking is {p-m-s}. What is the outcome?
6. What is the difference between a pay-as-you-go retirement
system and a fully funded system? Explain why
the former may run into problems if a large generation
is followed by a generation with many fewer members.
7. Assume that initially prescription drug prices are lower
in Canada than in the United States, and suppose all
barriers to drug trade between the two countries are
removed. In the absence of any price controls, what
would you predict will happen to drug prices in the
United States? in Canada? How does the difference in
the size of the two countries’ populations affect your
answer? If Canada has a system of price controls on
prescription drugs, what would you predict will happen
in the Canadian drug market if barriers to trade are
eliminated?
402 ∂ CHAPTER 17 THE PUBLIC SECTOR