What Do You Know About Public Finance?
Ready to test your Economic IQ? There are no trick questions involved, but some popular misconceptions get skewered.
January 13, 2015
How well do you understand public finance? Below is a quiz. Answer whether the statements are true or false, and briefly explain why. If you think that the statement is only sometimes true, or true under particular conditions, say “maybe” and explain. My answers follow the quiz, but first write down your own answers.
1. After a high tax on land value is in place, it will impose a burden on landowners and reduce the productivity and efficiency of the economy.
2. The best way to pay for a city bus service is to make the bus riders pay for the full cost.
3. The best way to decide whether a club should have a party is by a yes-no vote, with the majority of those voting deciding the outcome.
4. No decentralized pricing system can optimally provide collective consumption.
5. Subsidies that reduce the price of goods below the cost of production typically have net benefits to society.
6. The best policy for government budgets is always to avoid deficits, hence to finance all spending from current revenues such as taxes and fees.
7. The best way to handle pollution is with restrictive regulations, as these are less costly than pollution taxes or permits.
8. The least worst tax for the USA would be a flat-rate income tax with no deductions or credits.
9. The least worst tax for the USA would be a national sales tax that replaces the income tax.
10. Even if land rent is an efficient source of public revenue, there is not enough land rent to pay for the public goods wanted by the people.
1. False. A tax on land value reduces the price of land and replaces what would have been paid in mortgage interest. A land-value tax pushes land to its most productive use, increasing productivity and efficiency.
2. False. The best way to pay for mass transit is to charge riders only when the service would otherwise be too crowded, and just enough to prevent congestion. The rest of the cost is best paid for from the increase in the land rent generated by the transit.
3. False. The best way to decide on a club party is the method called "demand revelation." Each member records the most he would pay for the party. The amounts are added up. If the total is greater than the cost, have the party. To keep the members honest, if any member changed the outcome, relative to stating one's cost, that person has to compensate the group an amount equal to the net loss of everyone else (their stated values minus their costs). This method is better because it measures how much the members want the party, not just whether they want it.
4. False. Collective consumption paid for by land rent can be decentralized, because the rent reflects the demand to be located there, and the land will not flee, hide, or shrink when its rent is tapped to pay for collective goods.
5. False. The social cost of taxes that pay for subsidies is greater than the gain to consumers.
6. False. Government borrowing can be a good policy if the funds are spent for investments that are more productive than if the funds were spent in private investments. Otherwise, the budget should not have a deficit.
7. False. A charge or tax on pollution, based on its damage, is more effective than regulations and permits, and the funds can replace taxes that harm the economy.
8. False. A land-value tax is better for the economy than a flat-rate income tax.
9. False. A land-value tax is better for the economy than a national sales tax.
10. False. The Henry George Theorem in public finance shows that at the optimal provision, the amount of land rent equals the cost of providing public goods. Also, empirical studies show that land rent is about a third of national income, more than sufficient to pay for public goods.
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FRED E. FOLDVARY, Ph.D., (May 11, 1946 — June 5, 2021) was an economist who wrote weekly editorials for Progress.org since 1997. Foldvary’s commentaries are well respected for their currency, sound logic, wit, and consistent devotion to human freedom. He received his B.A. in economics from the University of California at Berkeley, and his M.A. and Ph.D. in economics from George Mason University. He taught economics at Virginia Tech, John F. Kennedy University, Santa Clara University, and San Jose State University.
Foldvary is the author of The Soul of Liberty, Public Goods and Private Communities, and Dictionary of Free Market Economics. He edited and contributed to Beyond Neoclassical Economics and, with Dan Klein, The Half-Life of Policy Rationales. Foldvary’s areas of research included public finance, governance, ethical philosophy, and land economics.
Foldvary is notably known for going on record in the American Journal of Economics and Sociology in 1997 to predict the exact timing of the 2008 economic depression—eleven years before the event occurred. He was able to do so due to his extensive knowledge of the real-estate cycle.