PUBLIC ECONOMICS

Tutorial

PART I: TRUE OR FALSE

1. The indicator usually used to measure the size of the public sector is the total expenditure of the state.
2. When resources are reallocated so that at least one person is better off without making anyone worse
off, there is a Pareto improvement.
3. The public sector uses market mechanisms to allocate resources.
4. A mixed economy is an economy that is regulated by both the invisible hand of the market and the
visible hand of the government, but the hand of the government is stronger.
5. Pareto improvement is based on personal values, regardless of how unfair the improvement may be.
6. Government intervention is the perfect solution to any market failure.
7. The market economy always works perfectly, without the need for government intervention.
8. The economic role of the government can only be expressed by macroeconomic policy.
9. Pareto efficiency is the only criterion for determining whether the allocation of resources is good or
bad.
10. Suppose the economy has two types of goods X and Y, two consumers A and B. To achieve product
mix efficiency then MRTXY = MRSXYA = MRSXYB
11. Pareto efficiency is the perfect indicator to measure the efficiency of an economy.
12. In unstable economic conditions, the allocation of resources according to the market mechanism
does not ensure the achievement of Pareto efficiency.
13. As long as the economy is perfectly competitive, the economy will inevitably move to a Pareto
efficient allocation of resources.
14. The Lorenz curve can be above, coinciding, or below the equality line.
15. When answering the question of what to produce for public goods, the government relies only on
subjective decisions, not on the law of supply and demand.
16. A Pareto efficient resource allocation is always better than another that is not Pareto efficient.
17. A Pareto efficient resource allocation is achieved when everyone receives the maximum benefits.
18. One of the disadvantages of a market economy is that it creates disparities in income.
19. An allocation is Pareto efficient when marginal social benefits equal marginal social costs.
20. According to the law of diminishing marginal utility, the less equitable the national income is
distributed, the lower the social welfare.
21. The marginal substitution rate between the two goods X and Y for each individual (MRSXY) reflects
the amount of goods Y that can be substituted for each unit of goods X.
22. The marginal technical substitution rate of labor for capital (MRTSLK) of each commodity is the
amount of labor that each unit of capital can replace without changing the output.
23. A public good cannot be provided privately.
24. Monopoly causes deadweight loss, so the government needs to intervene.
25. The farther the Lorenz curve is from the equality line, the lower the level of inequality.
26. Public goods are goods with low excludability in distribution and low competition in consumption.
27. Positive externalities do not cause deadweight loss, so the government does not need to intervene.
28. The Lorenz curve allows us to compare the level of inequality in income distribution between any two
countries.
29. Market failures are the basis for government intervention.
30. Asymmetric information is a case of market failure in which buyers have less information about goods
and markets than sellers.
31. The nonexcludable nature of public goods means that the owner of the good cannot prevent others
from using it.
32. Enterprises, when producing goods with external products, will produce an output level at which
marginal social benefits are smaller than marginal social costs.
33. If the Gini coefficient of urban areas is 0.35 and that of rural areas is 0.32, then the national coefficient
(including urban and rural areas) will be 0.67.
34. A perfectly competitive market is not regulated by the law of supply and demand because the producer
is a price-taker.
35. Because monopolies cause losses in social welfare, the government needs policies to eliminate
monopolies.
36. Public expenditure is understood in a broad sense as the entire cost of public activities financed by the
state budget.
37. Public goods aggregate bridges are built by adding individual bridges horizontally.
38. The social welfare function indicates the relationship between the adequacy of each individual and the
level of social welfare.
39. The regressive tax system is a system in which the rate of tax payable increases when the taxpayer's
income decreases and vice versa.
40. To know who is actually taxed, it is first necessary to determine whether the tax is levied on the supply
side or the demand side.
41. The deadweight loss of taxes increases in proportion to the square of the tax rate.
42. Doubling the tax rate more than doubles the deadweight loss.
43. Taxes increase total social welfare (reduce deadweight loss).
44. In a competitive market, the demand curve is flatter, the supply curve is steeper, and consumers are
subject to more taxes.
45. In the monopoly market, the marginal cost line is vertical, and the producer bears the entire tax.
46. Taxation will cause deadweight loss, while subsidies will not.
47. If the supply curve is very elastic while the demand curve is not, consumers will receive most of the
benefits of demand-side subsidies, provided that other factors remain the same.
48. To know consumers and producers, who really bear the tax burden, it is necessary to know whether
the tax is imposed on the supply side or the demand side.
49. The median voter is the person with the choice equal to the average of the voters with the lowest level
of preference and the voter with the highest level of preference.
50. The condition for the median voter theorem to take effect is that the preferences of voters are single-
peak preferences.

PART II: EXERCISES

1. Xuan is willing to exchange 3 shirts for 1 box of food and still feel satisfied as before. Thu is willing
to exchange 2 boxes of food for 3 shirts but still felt satisfied as before.
a. Has the current allocation of clothes and food between Xuan and Thu achieved Pareto efficiency?
b. Suggest a way to exchange between the two so that Xuan can benefit more without causing Thu to
lose.
c. Suggest a way to exchange between the two so that Thu can benefit more without causing Xuan to
lose.
d. Suggest a way to exchange between the two so that it is beneficial for both of them.

2. If you want to withdraw 1 unit of capital from the automobile manufacturing industry while
maintaining the output of this industry, you must add 10 units of labor. But if you want to withdraw 1
 unit of labor from the cotton industry without changing the output of this industry, you must add 1/4
unit of capital. How can we increase automobile production without affecting cotton production?

3. A simple market has 2 individuals consuming a commodity of X with the level of satisfaction gained
from consuming each unit of X as follows:
QX 1 2 3 4 5 6 7 8 9
TUX 60 110 150 180 200 206 211 215 218
a. How should you distribute X to maximize the utilitarian (Benthamite) social welfare?
b. How should you distribute X to maximize the max-min (Rawlsian) social welfare?

4. A firm’s production data are given in the following table: (Q: tons; MB, MPC: million VND)
Q 10 20 30 40 50 60 70 80 90 100
MPC 4 8 12 16 20 24 28 32 36 40
MB 52 48 44 40 36 32 28 24 20 16
Given that for every ton of good produced, the business pollutes and causes a damage of 2.4 million
VND. Determine:
a. The firm’s optimal output.
b. Deadweight loss due to pollution.
c. How much tax the government should impose on each ton of good produced, and the total tax
revenue of the government.
d. Change in the firm’s output due to tax.

5. A bee farm benefits a nearby apple farm, with the benefit estimated to be equivalent to 4 USD/ton of
product. The bee’s farm production data are given in the following table.
Production (tons) 1 2 3 4 5 6 7 8 9 10
Marginal cost (USD) 2 4 6 8 10 12 14 16 18 20
Marginal benefit (USD) 18 16 14 12 10 8 6 4 2 0
a. Draw a graph showing the bee farm’s costs and benefit.
b. If the bee farm does not care about the benefits it creates for the apple farm, how much will the bee
firm produce?
c. Determine deadweight loss.
d. If the government intervenes, what measures will the government use? What is the total tax collected
or subsidy provided?

6. Van Dien battery factory faces the following demand for its product A: P = 40 – 0.08Q, marginal cost
MC = 16 + 0.04Q and marginal external cost MEC = 8 + 0.04Q (P: thousand VND/product; Q:
thousands of products).
a. Determine the firm’ optimal output.
b. Determine the socially optimal output.
c. How much is the deadweight loss in this case?
d. What should the government do to minimize deadweight loss? How much subsidy should the
government provide or how much tax should the government collect?

7. The beef market has the following supply and demand functions: QD = 15 – 4P; QS = 6P – 1.
a. Determine the equilibrium price and output.
b. Determine producer surplus and consumer surplus.
c. The government imposes a tax of 2 units of currency per unit of beef. What is the new equilibrium
price and quantity?
 d. Determine the deadweight loss (DWL) caused by taxes.

8. The supply and demand function of a good is as follows: QD = 2500 – 20P; QS = 10P – 500.
a. Find the equilibrium price and quantity.
b. Determine the producer surplus and consumer surplus.
c. The government imposes a tax of 6 units of currency per unit of good on manufacturers. Calculate
the tax burden borne by the producer and the consumer, and the government’s tax revenue.
d. Calculate the loss in the consumer surplus and the loss in the producer surplus and deadweight loss
caused by the above tax policy.

9. A country has 10 individuals with income listed in the table below (million VND/year):
Individual A B C D E F G H I J
Income 3 7 10 15 13 8 5 4 2 17
a. Plot the Lorenz curve and calculate the Gini coefficient for this country.
b. If the poverty line is 5 million VND/year, and the government imposes a tax of 1 million
VND/person on everyone with income of 6 million VND/year or above, is the tax revenue adequate
to lift everyone in the country out of poverty?

10. The following table shows the expenditure of population groups in Vietnam in 2002 and 2006.
Near
Poorest Average Fairly Rich
poverty
2002 7,8 11,2 14,6 20,6 45,9
2006 7,2 11,5 15,8 22,3 43,3
Plot the Lorenz curve and calculate the Gini coefficient for each year. Has income distribution in
Vietnam become more equal during the period 2002-2006?