S O L U T IO N M AN U AL FO R P U BL I C F I NAN CE A CO N T E M P O RARY AP P L I CAT I O N O F T H EO R Y T O P O L I CY 1 2 T H E DI T I O N DAVI D N H Y M A N

SOLUTI O N MA N UA L FO R
c c c c c c c c c c c c



PUB L IC FIN AN C E A CO NTEMPOR ARY
c c c c c c c c c c c c c c c c c



AP PLIC AT ION OF THE O RY TO POLIC Y 12TH
c c c c c c c c c c c c c c c c c c c c c c c c c



ED I TION DAVI D N HYMAN
c c c c c c c c c c c c c c




CH A P TER 1 c c c c c




Individuals and Government c c




INSTRUCTIONAL OBJECTIVES C




Chapterc1ciscacgeneralcintroductionctocthecfieldcofcpubliccfinance,cemphasizingcthecrelationshipcbetweencind
ividualscandcgovernment.cThecfunctionscofcgovernmentcarecoutlined,candcthecimportancecofctaxescinchouseh
oldcbudgetscischighlighted.cThecchaptercseeksctocdevelopcancunderstandingcofcthececonomiccrolecofcgovern
mentcascacsuppliercofcusefulcgoodscandcservices.cStudentscarecalsocexpectedctocdigestcdataconcthecactualcexte
ntcofcgovernmentcactivitycincthecUnitedcStatescandcothercnations.cTheycshouldcknowctheccurrentcstructurecofc
governmentcexpenditurescandcrevenuescincthecUnitedcStates,chowcgovernmentchascgrowncsincec1920,candch
owcthecstructurecofcfederalcgovernmentcspendingchascchangedcsincec1960.
Incaddition,cthecchaptercseeksctocdemonstratecthatcthecproblemcofcscarcitycimpliescthatcancincreasecincr
esourcescdevotedctocgovernmentcgoodscandcservicescdecreasescavailabilitycofcresourcescforcnongovern-
cmentcuses.cItciscalsocmadecclearctocstudentschowcgovernmentcprovisioncofcgoodscandcservicescdifferscfromc

marketcprovisioncofcgoodscandcservices.


CHANGES IN THIS EDITION C C C




 Chapterc1cdiscussescthecgrowthcincgovernmentcspending,cthecimpactcofcslowceconomiccgrowthconcp
ubliccfinanceconcthecfederal,cstatecandclocalcgovernmentclevels,candchealthccarecissues.
 Allcdataconcgovernmentcspendingcandcrevenueschavecbeencupdatedctoctheclatestcavailablecyear.cPublicce
xpenditurecdatachavecbeencrevisedcusingctheclatestcNationalcIncomecandcProductcAccountc(NIPA)cfigu
rescforcgovernmentcconsumptioncandcinvestment,cdocumentingcthecrisecincthecsharecofcthecpubliccsecto
rcascacsharecofcGDPcsincec2001.
 ThecInternationalcViewconcgovernmentcspendingchascbeencrevisedcandcupdatedcwithctheclatestcdata.
 Discussioncofcmandatorycversuscdiscretionarycfederalcgovernmentcspendingchascbeencadded.
 Graphschavecbeencredonectocreflectctheclatestcavailablecobservations.


1

,2c |c PartcOnec |c ThecEconomiccBasiscofcGovernmentcActivity



 Thecdiscussioncofcthecmixcbetweenctransfercpaymentscandcgovernmentcconsumptionchascbeencrevised.c
Thecgrowthcinchealthccarecspendingcbycgovernmentchascbeencdocumented,cshowingcthatcitciscnowcthecla
rgestcandcfastestcgrowingccategorycofcfederalcgovernmentcexpenditure.
 Thecanalysiscofcthecimplicationscofcagingcpopulationscforcpubliccfinancechascbeencupdatedcbasedconcem
piricalcanalysiscofctheclatestcUNcprojectionscofcchangingcworldcdemographics.cThereciscmorecdiscussio
ncofcEuropeancagingcandcimplicationscforcpensioncsystems.cThecimpactcthecagingcpopulationconchealthc
carecspendingcincthecUnitedcStatesciscdiscussed.


CHAPTER OUTLINE C




Individuals,cSociety,candcGovernmentcGov

ernmentscandcPoliticalcInstitutions
ThecAllocationcofcResourcecbetweencGovernmentcandcPrivatecUsec
ThecMixedcEconomy,cMarkets,candcPolitics
GovernmentcExpenditurescincthecUnitedcStates

InternationalcView:cHowcMuchcGovernment?cThecSharecofcGovernmentcExpenditurecincModerncEconomie
s

ThecStructurecofcStatecandcLocalcGovernmentcExpenditurecFinancin

gcGovernmentcExpenditurecincthecUnitedcStates
MarketcFailurecandcthecFunctionscofcGovernment:cHowcMuchcGovernmentcIscEnough?cAging
Populations:cImplicationscforcPubliccFinance
c




MAJOR POINTS AND LECTURE SUGGESTIONS
C C C C




1. cMycobjectivecincthecfirstclecturecisctocmakecitcclearctocstudentschowceconomiccanalysiscofcthecfunc-
ctionscandcactivitiescofcgovernmentscfitscincwithctheircotherccourses.cSincecmostcstudentschavecalreadyc
hadcatcleastconeccoursecincmicroeconomics,cIcpointcoutchowcgovernmentsccancbecthoughtcofcascagents
cforcsupplyingcgoodscandcservicescwhosecquantitieschavecbeencdeterminedcthroughcpolitical,cascoppo

sedctocmarket,cinteraction.cThecrolecofcgovernmentcincthecmixedceconomyciscschematicallycillustrate
dcwithcacmodifiedccircularcflowcdiagram.cFigurec1.2crepresentscacusefulcstartingcpointcforcillustratingc
howcthececonomiccanalysiscofcgovernmentcfitscincwithcpreviouscanalysescofcmarketsctocwhichcmostcs
tudentscwillchavecalreadycbeencexposed.cIcusuallycdrawcthecdiagramconcthecboardcandcshowchowcboth
chouseholdscandcbusinesscfirmschavececonomiccrelationscwithcgovernments.



2. Thectradeoffcbetweencgovernmentcgoodscandcservices,candcprivatecgoodscandcservicesciscillustratedcw
ithcthecproductioncpossibilityccurve.cFigurec1.1ciscfamiliarctocmostcstudents,candcitscapplicationctocana
lysiscofcgovernmentcgoodscandcservicescusuallyccapturesctheircattention.cItchelpsctocusecthecgraphcinccl
assctocdiscusscreallocationcofcresourcescfromcmilitaryctocnonmilitarycuses.cAnothercinterestingcusecofc
thecgraphcisctocshowchowcincreasedcenvironmentalcqualitycimprovementcservicescsuppliedcbycgovern
mentcwillcrequirecthecsacrificecofcmaterialcgoodscandcservices,cascthecpricescofcsuchcproductscascfuel,c
electricity,candcautomobilescrise.


©c2021cCengagecLearning,cInc.cAllcRightscReserved. cMaycnotcbecscanned,ccopiedcorcduplicated,corcpostedctocacpubliclycaccessiblecwebsite,cincwholecorcincp
art.

, 3. Emphasizecthatcgovernmentcgoodscandcservicescarecusuallycmadecavailablecthroughcnonpricecr
ationing:
a. Governmentcgoodscarecoftencavailablecforccollectivecusecatcnocdirectccharge,cascisctheccasecforcr
oads,cnationalcdefense,cpolicecservices,cfirecprotection,candcenvironmentalcprotection.
b. Eligibilitycforcobtainingcthecbenefitscofcgovernmentcservicesciscdeterminedcbyccriteriacothercthan
cabilitycandcwillingnessctocpay.cPoliticallycdeterminedccriteria,csuchcascage,cincome,cfamilycstatu

s,candclocationcofcresidence,coftencdeterminecacperson’sceligibilityctocreceivecgovernmentctransf
erscsuchcascfoodcstampscandcservicescsuchcascpubliccschooling.

4. Acgeneralclistingcofcthecfunctionscofcgovernment,cascdiscussedcincthectext,ciscusefulctocstudents.cT
hesecfunctionscarecascfollows:
a. Provisioncofcusefulcgoodscandcservices,cincludingcthecestablishmentcofcpropertycrightscandcthecu
nderlyingclegalcsystem
b. Redistributioncofcincomecandceconomiccopportunitycamongccitizens
c. Stabilizationc (Notecthatcthisciscnotccoveredcincthectext.)
d. Regulationcofcprivatecaction
5. Notecthatcthecdiscussioncofcgovernmentcfinancecincthecchaptercbrieflycoutlinescthecfactcthatctheccon-
csequencescofcalternativecmeanscofcfinancecdiffercinctermscofcthecimpactconcincentivesctocproducecandc

oncthecdistributioncofcwell-being.

6. IcusuallycphotocopycthectablescincChapterc1candcbringcthemctocclasscforcthecsecondclecture.cIcbelievect
hatcitciscimportantcforcstudentsctochavecsomecappreciationcofctheccurrentcextentcofcgovernmentcandcth
ecgrowthcofcexpenditurescandcrevenuescincrecentcyears.

7. Incadditionctocillustratingcthecgrowthcofcgovernment,cIcseekctocshowchowcthecstructurecofcfederalcgov
ernmentcexpenditurechascchangedcsignificantlycsincec1960.cFirst,cpointcoutctocstudentscthecspec-
ctacularcgrowthcincthecrelativecimportancecofctransferscfromc1960ctoc1980.cYouccancalsocpointcoutctha

tctransferscstabilizedcatcclosectoc40cpercentcofcfederalcspendingcincthec1970s.c Aftercdecliningcslightlyc
ascacsharecofcfederalcspendingcincthec1980s,ctheycrosecagaincincthec1990scandcnowcaccountcforcaboutc
43cpercentcofcfederalcspending.cFederalcgovernmentcpurchasescofcgoodscandcservicescforcconsumpti
oncandcinvestmentchascdeclinedcfromcoverc60cpercentcofcfederalcspendingcinc1960ctoc27cpercentcinc19
99.cSincecthecendcofcthecColdcWar,cpurchaseschavecdeclinedcascdefensecspendingchascbeenccutcback.c
However,cthecterroristcattackscofcSeptemberc11,c2001,cresultedcincbothcincreasedcgovernmentcspendi
ngcandcacshiftcawaycfromctransfersctowardcgovernmentcconsumption.

8. Incdiscussingcactualcexpenditures,cusecTablec1.3candcthecaccompanyingcpiecchartctocshowcthecimpor-
ctancecofcSocialcSecurity,cincomecsecurity,cMedicare,candchealthcforcthecfederalcgovernment;candcpoin

tcoutcthatcthesecprogramscaccountcforcaboutc63cpercentcofcfederalcgovernmentcexpenditures.cAlsocpoin
tcoutcthatcaboutc32cpercentcofcstatecandclocalcgovernmentcexpenditureciscaccountedcforcbyceducation.c
Healthccarecspendingcbycstatecandclocalcgovernments,cmainlycforcMedicaid,chascbeencgrowingcrapidly
candcnowcaccountscforcaboutc24cpercentcofcstatecandclocalcgovernmentcspending.



9. Usecthecdatacandcaccompanyingcpiecchartscincthecchapterctocshowcstudentschowcincomectaxes,cincl
udingcpayrollctaxescandccorporatecprofitsctaxes,caccountcforcmorecthanc90cpercentcofcfederalcgover
nmentcrevenue.cAlsocpointcoutcthatcsalescandcpropertyctaxescaccountcforcnearlychalfcofcstatecandcloc
alcgovernmentcrevenuescandcthatconecincfivecdollarscofcreceiptscreceivedcbycstatecandclocalcgovern
mentsccomescfromcfederalcgrants-in-aid.
10. Manycinstructorscarecnowcspendingcmorectimecincclasscdiscussingcstatecandclocalcgovernmentcfiscalcp
roblems.cAcsectioncincChapterc1cdiscussescthecstructuralcproblemscthatcarecunderlyingcstate
©c2021cCengagecLearning,cInc.cAllcRightscReserved. cMaycnotcbecscanned,ccopiedcorcduplicated,corcpostedctocacpubliclycaccessiblecwebsite,cincwholecorcincp
art.

, 4c |c PartcOnec |c ThecEconomiccBasiscofcGovernmentcActivity


governmentcbudgetscandcdiscussescthecsituationcandcimpactconcbudgetscforcselectedcstatescthatchavecbe
encparticularlychardchitcbycrevenuecshortfalls.

11. Agingcofcpopulationschascimplicationscforcpubliccfinance,cespeciallycforcSocialcInsurancec
programs.cAcsectioncincthiscchaptercprovidescinformationconcagingcofcthecpopulation,cdepe
ndencycratioscworldwide,calongcwithcimplicationscforcgovernmentcspending.


ANSWERS TO TEXT PROBLEMS
C C C




1. Givencacpointconcthecoldcproductioncpossibilityccurve,cthecoutwardcshiftcallowscmovementcincthecnor
theastcdirectionctocacpointconcthecnewcproductioncpossibilityccurveccorrespondingctocancincreasecincpr
oductioncofcbothcprivatecandcgovernmentcgoodscandcservices.

2. Thecincreasedcallocationcofcresourcesctocgovernmentcprovisioncofchealthcservicescimpliescthatcfewercr
esourcesccancbecusedcforcothercgoodscandcservices.cThecstudentcshouldcplotchealthccarecservicesconcon
ecofcthecaxescandc―allcothercgoodscandcservices‖concthecothercaxis.cAscproductioncofchealthccarecservi
cescincreases,cgivencfixedcresourcescandctechnology,cproductioncofcothercgoodscandcservicescmustcde
cline.

3. SocialcSecuritycpensionscarecgovernmentctransfers.cExceptcforcacsmallcamountcofcpurchasescforcp
ersonnelcandcothercresourcesctocadministercthectransfer,cnocgovernmentcpurchasescarecrequired.

4. Thecdebtcaccumulatedcbycpastcbudgetscamountsctocmanyctimescmorecthancthecamountcofcfederalcspe
nding.cItcwillctakecmanycyearsctocretirecthecoutstandingcdebt.cThecinterestconcthecoutstandingcdebtcw
illchavectocbecpaidcforcmanycyearscuntilcthecdebtciscretired.cRunningcacbudgetcsurpluscwouldcaccelera
tecthecratecofcdebtcrepayment.
5. Evencthoughcmanycprogramscarecfederallycfunded,csuchcas,cMedicare,cprogramscsuchcascMedicaidcar
ecpartiallycstatecfunded.cConsequently,cthecagingcpopulationcwillcincreasecstatecexpenditurescascMedi
caidcandcotherchealthccarecprogramscbecomecmorecexpensivecduectocincreasedcdemand.cThecagingcpo
pulationcwillcalsocimpactcstatecgovernmentcrevenuecascthecpopulationcleavescthecworkforcecandccontr
ibutesclesscandclesscincthecformcofcpersonalcincomectax,csalesctax,candcpropertyctax.


A NOTE ON THE APPENDIX TO CHAPTER 1
C C C C C C C




ThecappendixctocChapterc1ciscacconcisecreviewcofcbasiccmicroeconomiccprinciplescusedcthroughoutcthectext.c
Thecmaterialciscdesignedctocaidcstudentscwithcweakcbackgroundscincbasicceconomicctheory.cItcalsocprovidesc
acconvenientcreferencecforcstudentscwhocwishctocreviewcbasiccconceptscasctheycarecneeded.cIcadvisecmycstud
entsctocreadcthecappendix,cbutcIcdocnotccovercanycofcthecmaterialcincclass.


OUTLINE OF THE APPENDIX TO CHAPTER 1
C C C C C C




IndifferencecCurvecAnalysiscAnalysi

scofcProductioncandcCost
ProfitcMaximization,cCompetition,candcSupply




©c2021cCengagecLearning,cInc.cAllcRightscReserved. cMaycnotcbecscanned,ccopiedcorcduplicated,corcpostedctocacpubliclycaccessiblecwebsite,cincwholecorcincp
art.