Solution Manual for Public Finance: A
Contemporary Application of Theory to
Policy 12th Edition Latest Version
2025/2026 [A+]
by David Hyman (Author)
,PUBLIC FINANCE: A CONTEMPORARY APPLICATION OF THEORY TO POLICY, 12E.
CHAPTER ONE
Individuals And Government
INSTRUCTIONAL OBJECTIVES
Chapter 1 Is A General Introduction To The Field Of Public Finance, Emphasizing The Relationship
Between Individuals And Government. The Functions Of Government Are Outlined, And The
Importance Of Taxes In Household Budgets Is Highlighted. The Chapter Seeks To Develop An
Understanding Of The Economic Role Of Government As A Supplier Of Useful Goods And Services.
Students Are Also Expected To Digest Data On The Actual Extent Of Government Activity In The
United States And Other Nations. They Should Know The Current Structure Of Government
Expenditures And Revenues In The United States, How Government Has Grown Since 1920, And How
The Structure Of Federal Government Spending Has Changed Since 1960.
In Addition, The Chapter Seeks To Demonstrate That The Problem Of Scarcity Implies That An
Increase In Resources Devoted To Government Goods And Services Decreases Availability Of Resources
For Nongovern- Ment Uses. It Is Also Made Clear To Students How Government Provision Of Goods
And Services Differs From Market Provision Of Goods And Services.
CHANGES IN THIS EDITION
Chapter 1 Discusses The Growth In Government Spending, The Impact Of Slow Economic
Growth On Public Finance On The Federal, State And Local Government Levels, And Health
Care Issues.
All Data On Government Spending And Revenues Have Been Updated To The Latest Available
Year. Public Expenditure Data Have Been Revised Using The Latest National Income And Product
Account (NIPA) Figures For Government Consumption And Investment, Documenting The Rise In
The Share Of The Public Sector As A Share Of GDP Since 2001.
The International View On Government Spending Has Been Revised And Updated With The Latest Data.
Discussion Of Mandatory Versus Discretionary Federal Government Spending Has Been Added.
Graphs Have Been Redone To Reflect The Latest Available Observations.
1
,2 | Part One | The Economic Basis Of Government Activity
The Discussion Of The Mix Between Transfer Payments And Government Consumption Has Been
Revised. The Growth In Health Care Spending By Government Has Been Documented, Showing
That It Is Now The Largest And Fastest Growing Category Of Federal Government Expenditure.
The Analysis Of The Implications Of Aging Populations For Public Finance Has Been Updated
Based On Empirical Analysis Of The Latest UN Projections Of Changing World Demographics.
There Is More Discussion Of European Aging And Implications For Pension Systems. The Impact
The Aging Population On Health Care Spending In The United States Is Discussed.
CHAPTER OUTLINE
Individuals, Society, And Government
Governments And Political Institutions
The Allocation Of Resource Between Government And Private
Use The Mixed Economy, Markets, And Politics
Government Expenditures In The United States
International View: How Much Government? The Share Of Government Expenditure In Modern
Economies
The Structure Of State And Local Government Expenditure
Financing Government Expenditure In The United States
Market Failure And The Functions Of Government: How Much Government Is Enough?
Aging Populations: Implications For Public Finance
MAJOR POINTS AND LECTURE SUGGESTIONS
1. My Objective In The First Lecture Is To Make It Clear To Students How Economic Analysis Of
The Func- Tions And Activities Of Governments Fits In With Their Other Courses. Since Most
Students Have Already Had At Least One Course In Microeconomics, I Point Out How
Governments Can Be Thought Of As Agents For Supplying Goods And Services Whose
Quantities Have Been Determined Through Political, As Opposed To Market, Interaction. The
Role Of Government In The Mixed Economy Is Schematically Illustrated With A Modified
Circular Flow Diagram. Figure 1.2 Represents A Useful Starting Point For Illustrating How The
Economic Analysis Of Government Fits In With Previous Analyses Of Markets To Which Most
Students Will Have Already Been Exposed. I Usually Draw The Diagram On The Board And
Show How Both Households And Business Firms Have Economic Relations With Governments.
2. The Tradeoff Between Government Goods And Services, And Private Goods And Services Is
Illustrated With The Production Possibility Curve. Figure 1.1 Is Familiar To Most Students, And
Its Application To Analysis Of Government Goods And Services Usually Captures Their Attention.
It Helps To Use The Graph In Class To Discuss Reallocation Of Resources From Military To
Nonmilitary Uses. Another Interesting Use Of The Graph Is To Show How Increased
Environmental Quality Improvement Services Supplied By Government Will Require The
Sacrifice Of Material Goods And Services, As The Prices Of Such Products As Fuel, Electricity,
And Automobiles Rise.
, 3. Emphasize That Government Goods And Services Are Usually Made Available Through
Nonprice Rationing:
a. Government Goods Are Often Available For Collective Use At No Direct Charge, As Is The
Case For Roads, National Defense, Police Services, Fire Protection, And Environmental
Protection.
b. Eligibility For Obtaining The Benefits Of Government Services Is Determined By Criteria
Other Than Ability And Willingness To Pay. Politically Determined Criteria, Such As Age,
Income, Family Status, And Location Of Residence, Often Determine A Person’s Eligibility
To Receive Government Transfers Such As Food Stamps And Services Such As Public
Schooling.
4. A General Listing Of The Functions Of Government, As Discussed In The Text, Is Useful To
Students. These Functions Are As Follows:
a. Provision Of Useful Goods And Services, Including The Establishment Of Property Rights
And The Underlying Legal System
b. Redistribution Of Income And Economic Opportunity Among Citizens
c. Stabilization (Note That This Is Not Covered In The Text.)
d. Regulation Of Private Action
5. Note That The Discussion Of Government Finance In The Chapter Briefly Outlines The Fact That
The Con- Sequences Of Alternative Means Of Finance Differ In Terms Of The Impact On
Incentives To Produce And On The Distribution Of Well-Being.
6. I Usually Photocopy The Tables In Chapter 1 And Bring Them To Class For The Second Lecture. I
Believe That It Is Important For Students To Have Some Appreciation Of The Current Extent Of
Government And The Growth Of Expenditures And Revenues In Recent Years.
7. In Addition To Illustrating The Growth Of Government, I Seek To Show How The Structure Of
Federal Government Expenditure Has Changed Significantly Since 1960. First, Point Out To
Students The Spec- Tacular Growth In The Relative Importance Of Transfers From 1960 To 1980.
You Can Also Point Out That Transfers Stabilized At Close To 40 Percent Of Federal Spending In
The 1970s. After Declining Slightly As A Share Of Federal Spending In The 1980s, They Rose
Again In The 1990s And Now Account For About 43 Percent Of Federal Spending. Federal
Government Purchases Of Goods And Services For Consumption And Investment Has Declined
From Over 60 Percent Of Federal Spending In 1960 To 27 Percent In 1999. Since The End Of The
Cold War, Purchases Have Declined As Defense Spending Has Been Cut Back. However, The
Terrorist Attacks Of September 11, 2001, Resulted In Both Increased Government Spending And
A Shift Away From Transfers Toward Government Consumption.
8. In Discussing Actual Expenditures, Use Table 1.3 And The Accompanying Pie Chart To Show The
Impor- Tance Of Social Security, Income Security, Medicare, And Health For The Federal
Government; And Point Out That These Programs Account For About 63 Percent Of Federal
Government Expenditures. Also Point Out That About 32 Percent Of State And Local Government
Expenditure Is Accounted For By Education. Health Care Spending By State And Local
Governments, Mainly For Medicaid, Has Been Growing Rapidly And Now Accounts For About 24
Percent Of State And Local Government Spending.
9. Use The Data And Accompanying Pie Charts In The Chapter To Show Students How Income
Taxes, Including Payroll Taxes And Corporate Profits Taxes, Account For More Than 90
Percent Of Federal Government Revenue. Also Point Out That Sales And Property Taxes
Account For Nearly Half Of State And Local Government Revenues And That One In Five
Dollars Of Receipts Received By State And Local Governments Comes From Federal Grants-In-
Aid.
10. Many Instructors Are Now Spending More Time In Class Discussing State And Local
Government Fiscal Problems. A Section In Chapter 1 Discusses The Structural Problems That
Contemporary Application of Theory to
Policy 12th Edition Latest Version
2025/2026 [A+]
by David Hyman (Author)
,PUBLIC FINANCE: A CONTEMPORARY APPLICATION OF THEORY TO POLICY, 12E.
CHAPTER ONE
Individuals And Government
INSTRUCTIONAL OBJECTIVES
Chapter 1 Is A General Introduction To The Field Of Public Finance, Emphasizing The Relationship
Between Individuals And Government. The Functions Of Government Are Outlined, And The
Importance Of Taxes In Household Budgets Is Highlighted. The Chapter Seeks To Develop An
Understanding Of The Economic Role Of Government As A Supplier Of Useful Goods And Services.
Students Are Also Expected To Digest Data On The Actual Extent Of Government Activity In The
United States And Other Nations. They Should Know The Current Structure Of Government
Expenditures And Revenues In The United States, How Government Has Grown Since 1920, And How
The Structure Of Federal Government Spending Has Changed Since 1960.
In Addition, The Chapter Seeks To Demonstrate That The Problem Of Scarcity Implies That An
Increase In Resources Devoted To Government Goods And Services Decreases Availability Of Resources
For Nongovern- Ment Uses. It Is Also Made Clear To Students How Government Provision Of Goods
And Services Differs From Market Provision Of Goods And Services.
CHANGES IN THIS EDITION
Chapter 1 Discusses The Growth In Government Spending, The Impact Of Slow Economic
Growth On Public Finance On The Federal, State And Local Government Levels, And Health
Care Issues.
All Data On Government Spending And Revenues Have Been Updated To The Latest Available
Year. Public Expenditure Data Have Been Revised Using The Latest National Income And Product
Account (NIPA) Figures For Government Consumption And Investment, Documenting The Rise In
The Share Of The Public Sector As A Share Of GDP Since 2001.
The International View On Government Spending Has Been Revised And Updated With The Latest Data.
Discussion Of Mandatory Versus Discretionary Federal Government Spending Has Been Added.
Graphs Have Been Redone To Reflect The Latest Available Observations.
1
,2 | Part One | The Economic Basis Of Government Activity
The Discussion Of The Mix Between Transfer Payments And Government Consumption Has Been
Revised. The Growth In Health Care Spending By Government Has Been Documented, Showing
That It Is Now The Largest And Fastest Growing Category Of Federal Government Expenditure.
The Analysis Of The Implications Of Aging Populations For Public Finance Has Been Updated
Based On Empirical Analysis Of The Latest UN Projections Of Changing World Demographics.
There Is More Discussion Of European Aging And Implications For Pension Systems. The Impact
The Aging Population On Health Care Spending In The United States Is Discussed.
CHAPTER OUTLINE
Individuals, Society, And Government
Governments And Political Institutions
The Allocation Of Resource Between Government And Private
Use The Mixed Economy, Markets, And Politics
Government Expenditures In The United States
International View: How Much Government? The Share Of Government Expenditure In Modern
Economies
The Structure Of State And Local Government Expenditure
Financing Government Expenditure In The United States
Market Failure And The Functions Of Government: How Much Government Is Enough?
Aging Populations: Implications For Public Finance
MAJOR POINTS AND LECTURE SUGGESTIONS
1. My Objective In The First Lecture Is To Make It Clear To Students How Economic Analysis Of
The Func- Tions And Activities Of Governments Fits In With Their Other Courses. Since Most
Students Have Already Had At Least One Course In Microeconomics, I Point Out How
Governments Can Be Thought Of As Agents For Supplying Goods And Services Whose
Quantities Have Been Determined Through Political, As Opposed To Market, Interaction. The
Role Of Government In The Mixed Economy Is Schematically Illustrated With A Modified
Circular Flow Diagram. Figure 1.2 Represents A Useful Starting Point For Illustrating How The
Economic Analysis Of Government Fits In With Previous Analyses Of Markets To Which Most
Students Will Have Already Been Exposed. I Usually Draw The Diagram On The Board And
Show How Both Households And Business Firms Have Economic Relations With Governments.
2. The Tradeoff Between Government Goods And Services, And Private Goods And Services Is
Illustrated With The Production Possibility Curve. Figure 1.1 Is Familiar To Most Students, And
Its Application To Analysis Of Government Goods And Services Usually Captures Their Attention.
It Helps To Use The Graph In Class To Discuss Reallocation Of Resources From Military To
Nonmilitary Uses. Another Interesting Use Of The Graph Is To Show How Increased
Environmental Quality Improvement Services Supplied By Government Will Require The
Sacrifice Of Material Goods And Services, As The Prices Of Such Products As Fuel, Electricity,
And Automobiles Rise.
, 3. Emphasize That Government Goods And Services Are Usually Made Available Through
Nonprice Rationing:
a. Government Goods Are Often Available For Collective Use At No Direct Charge, As Is The
Case For Roads, National Defense, Police Services, Fire Protection, And Environmental
Protection.
b. Eligibility For Obtaining The Benefits Of Government Services Is Determined By Criteria
Other Than Ability And Willingness To Pay. Politically Determined Criteria, Such As Age,
Income, Family Status, And Location Of Residence, Often Determine A Person’s Eligibility
To Receive Government Transfers Such As Food Stamps And Services Such As Public
Schooling.
4. A General Listing Of The Functions Of Government, As Discussed In The Text, Is Useful To
Students. These Functions Are As Follows:
a. Provision Of Useful Goods And Services, Including The Establishment Of Property Rights
And The Underlying Legal System
b. Redistribution Of Income And Economic Opportunity Among Citizens
c. Stabilization (Note That This Is Not Covered In The Text.)
d. Regulation Of Private Action
5. Note That The Discussion Of Government Finance In The Chapter Briefly Outlines The Fact That
The Con- Sequences Of Alternative Means Of Finance Differ In Terms Of The Impact On
Incentives To Produce And On The Distribution Of Well-Being.
6. I Usually Photocopy The Tables In Chapter 1 And Bring Them To Class For The Second Lecture. I
Believe That It Is Important For Students To Have Some Appreciation Of The Current Extent Of
Government And The Growth Of Expenditures And Revenues In Recent Years.
7. In Addition To Illustrating The Growth Of Government, I Seek To Show How The Structure Of
Federal Government Expenditure Has Changed Significantly Since 1960. First, Point Out To
Students The Spec- Tacular Growth In The Relative Importance Of Transfers From 1960 To 1980.
You Can Also Point Out That Transfers Stabilized At Close To 40 Percent Of Federal Spending In
The 1970s. After Declining Slightly As A Share Of Federal Spending In The 1980s, They Rose
Again In The 1990s And Now Account For About 43 Percent Of Federal Spending. Federal
Government Purchases Of Goods And Services For Consumption And Investment Has Declined
From Over 60 Percent Of Federal Spending In 1960 To 27 Percent In 1999. Since The End Of The
Cold War, Purchases Have Declined As Defense Spending Has Been Cut Back. However, The
Terrorist Attacks Of September 11, 2001, Resulted In Both Increased Government Spending And
A Shift Away From Transfers Toward Government Consumption.
8. In Discussing Actual Expenditures, Use Table 1.3 And The Accompanying Pie Chart To Show The
Impor- Tance Of Social Security, Income Security, Medicare, And Health For The Federal
Government; And Point Out That These Programs Account For About 63 Percent Of Federal
Government Expenditures. Also Point Out That About 32 Percent Of State And Local Government
Expenditure Is Accounted For By Education. Health Care Spending By State And Local
Governments, Mainly For Medicaid, Has Been Growing Rapidly And Now Accounts For About 24
Percent Of State And Local Government Spending.
9. Use The Data And Accompanying Pie Charts In The Chapter To Show Students How Income
Taxes, Including Payroll Taxes And Corporate Profits Taxes, Account For More Than 90
Percent Of Federal Government Revenue. Also Point Out That Sales And Property Taxes
Account For Nearly Half Of State And Local Government Revenues And That One In Five
Dollars Of Receipts Received By State And Local Governments Comes From Federal Grants-In-
Aid.
10. Many Instructors Are Now Spending More Time In Class Discussing State And Local
Government Fiscal Problems. A Section In Chapter 1 Discusses The Structural Problems That
