Problem 1
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?
Problem 2
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?
Problem 3
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.
Problem 4
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 \(£ 5000 ?\)
Problem 5
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.
Problem 7
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?
Problem 8
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.
Problem 9
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?
Problem 10
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?
Problem 14
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?
