Union Christian College

School of Business Science

Basic Microeconomics

Name: Score:
Course & Year: Date: December 09, 2023

I: Here is a list of possible explanations for government programs and policies. In each case,
identify whether the explanation reflects the public interest theory or the public choice
theory of government action.

1. “It is possible to explain much government activity by investigating the public’s demand
for government services, but one should not ignore the incentives for increased supply of
government services.”

2. “Through careful application of cost-benefit analysis, we can identify the amount of a

public good that should be provided by the government.”

3. “The determination of what are merit or demerit goods is inherently political rather than
scientific and more often than not can be traced to the efforts of groups with an ax to grind or
some private motive to pursue.”

4. “While it is possible that policy makers follow some well-reasoned-out application of

ability-to-pay or benefit-received principles, it is more credible to recognize that many of the
taxes in this country reflect the fact that groups find it in their interest to organize to get tax
burdens shifted to others.”

5. “It is in the public interest to correct the market failure caused by monopoly firms.
Therefore, it behooves us to do so.”

II: Give your opinions on the following questions.

a. How could a program that redistributes income from rich to poor be considered a public
good?

b. How would you define poverty? How would you determine whether a particular family is
poor? Is the test you have proposed an absolute or a relative test?

c. Determine whether a tax on any of the following goods would be progressive, proportional, or
regressive and why? (1) Food; 2 )Clothing; (3) Entertainment.

d. Suppose a landowner is required to refrain from developing his or her land in order to
preserve the habitat of an endangered species. The restriction reduces the value of the land
by 50%, to $1 million. Under present law, the landowner does not have to be compensated.
Several proposals considered by Congress would require that this landowner be
compensated. How does this affect the cost of the regulation?

e. What is so bad about price-fixing? Why does the government prohibit it?

f. Explain how licensing requirements for providers of particular services result in higher prices
for such services. Are such requirements justified? Why or why not?

g. “Environmental quality is not just a matter of technical efficiency; it’s about how people
relate to nature. Economists are completely off base in their analysis of the benefits and costs
of pollution.” What is your opinion of this quote?

h. Some people object that charging firms for their emissions will do no good—firms will simply
raise their prices and go on doing what they were doing before. Comment on this objection to
emissions taxes.

i. Suppose a welfare program provides a basic grant of Php10,000 per year to poor families but
reduces the grant by $1 for every Php1 of income earned. How would such a program affect a
household’s incentive to work?