Government expenditure

  1. Suppose every member of Congress genuinely believes that government expenditures are excessive and ought to be reduced by at least 10 percent. Why would this not be sufficient to assure a 10 percent reduction?
  2. Why do so many members of Congress believe that the federal government should subsidize local projects, such as improvements in bus or subway systems in major cities?
  3. Who would benefit from construction of a subway system in a large city?
  4. Can you think of a public-interest argument for having taxpayers across the country pay for a local subway system?
  5. If you knew that your taxes were going to go up $10 a year in order to finance a subway in some distant city, would you write a letter of protest to your legislator?
  6. If your city were being considered for a large federal grant to subsidize an improvement in the local public transportation system, would you expect your local government officials to go to Washington and lobby actively for it? Would you expect your congressional representatives to support it? Would you form a more favorable opinion of local officials and congressional representatives if your city proved successful in its grant application?
  7. Should countries with vast natural resources be required to help those with little-to-no natural resources? For example, oil-rich Qatar, which provides free health care to all its natural citizens, be required by law to provide health care to all of the citizens of Tanzania because its government doesn’t have the same type of natural resources? Explain your answer.
  8. How important is economic growth? Does it really make people better off in the long run? Or, as the question is sometimes misleadingly put, “Can money buy happiness?”
  9. Our desires and satisfactions are often relative not only to what others have but also to what we ourselves have become accustomed to. A small amount of tasteless food can be the source of immense satisfaction to a very hungry person. Is the marginal satisfaction gained by upgrading from codfish to jumbo prawns or from processed cheese to brie as great as the marginal satisfaction in going from one cup of rice per day to two? The marginal cost of the last improvement is surely far less.
  10. Advocates of zero economic growth are principally concerned about the deleterious effects of economic growth on the environment. Does economic growth necessarily lower the quality of the environment?
  11. The behavior of almost everyone indicates that people believe they will be better off if they earn a larger income, because a larger income means the ability to acquire more of what they want almost, but not quite, without regard to what it is that they want. But to what extent is this desire for more relative to what others have? If everyone else in the society is also acquiring more, how much satisfaction will I obtain from getting more? Will the marginal benefit exceed the marginal cost?
  • The production of linen requires twice as much land and labor as the production of an equivalent amount of cotton. Nevertheless, linen is a staple material utilized in designer clothing, such as women’s blazers and dresses with prices exceeding $2,000, men’s trench coats that sell for more than $1,500, and wedding gowns priced above $5,500.
  • Two-thirds of the world’s linen is derived from a fiber called flax that is harvested within a narrow belt of farmland stretching from northern France into the Netherlands. The European coastal climate provides alternating sunshine and rain that contribute to development of a fungus that grows on the flax stems. The fungus breaks down the stems so that the linen fibers can be more readily separated from the plants. Thus, farmers residing this area are able to produce flax at a lower opportunity cost, in terms of forgone production of other goods, than almost anywhere else on the planet. This fact explains why this region of Europe has a comparative advantage in growing flax and specializes in the production of linen.
  • Why do you think that linen production generates gains from trade for European producers of flax and linen, even though cotton-based fabrics can be produced at lower absolute cost in many other parts of the world?
  1. The U.S. Export-Import (Exim) Bank regularly extends about $100 billion in subsidized loans to foreign buyers of U.S.-manufactured products, including aircraft, hair-care products, and construction equipment. The Exim Bank’s extensions of taxpayer-subsidized credit to companies in other nations gives these foreign firms incentives to buy U.S. exports.

Airlines based in the United States are not enthused about aircraft-loan subsidies to competitors based in other nations, however. The U.S. airlines argue that the Exim Bank’s low-interest loans to foreign carriers provide a cost advantage that enables the foreign airlines to compete at lower expense in the international air transportation market. Thus, from the U.S. airlines’ point of view, U.S. taxpayers are subsidizing their foreign competitors.

Why do you suppose that some U.S. makers of hair-care products and certain U.S. construction contractors that bid for work in other nations have lodged complaints similar to those of the U.S. airlines?

  1. Among the imported items for which the 1991 legislation sharply reduced U.S. tariff rates were Colombian cut flowers. The Colombian climate is superior to that of the western United States for growing most flowers, and Colombian farm labor costs are much lower. Thus, within a few years after the reduction in tariffs, Colombian flower growers had established a network for selling cut flowers in California.

Furthermore, in 2010, the Colombian firms opened a large distribution center in Los Angeles to increase the flow of cut-flower imports into the United States. As Figure 32-7 on page 721 of your textbook indicates, Colombian flower growers’ efforts led to a substantial increase in U.S. flower imports from that nation during the 2000s. By 2010, U.S. imports of Colombian cut flowers were nearly 400 percent greater than the 2002 level. As Colombian flower imports into California bloomed, the sales of cut flowers by California growers shriveled. When Congress passed the Andean Trade Promotion Act, there were 450 Californian flower farms. By 2010, there were 250.

In response to the upsurge in competition from Colombia, the California Cut Flower Commission, a trade association, successfully lobbied to delay congressional approval of a renewal of the Andean regional trade pact. The consequence was a re-imposition in 2011 of tariffs on Colombian flower growers, whose tariff payments increased sharply. As shown in Figure 32-7 on page 721, this significant tariff increase resulted in a considerable reduction in cut-flower imports from Colombia. As a consequence, the foreign supply of cut flowers in California decreased, and the demand for Californian cut flowers increased, which pushed up U.S. prices of cut flowers. Even as California flower growers’ earnings flourished, they began lobbying for U.S. government subsidies to enable them to establish their own cut-flower distribution center to compete with Colombia’s.

  1. Which region appears to have a comparative advantage in producing cut flowers: Colombia or California? Explain.
  2. How have U.S. consumers of cut flowers been affected by the cutback in Colombian imports?


Find out more about the Columbian Trade Promotion go to USTR.

Learn about the Colombian flower industry at

  1. Suppose that the People’s Bank of China wishes to peg the rate of exchange of its currency, the yuan, in terms of the U.S. dollar. In each of the following situations, should it add to or subtract from its dollar foreign exchange reserves? Why?
  2. U.S. parents worrying about safety begin buying fewer Chinese-made toys for their children.
  3. U.S. interest rates rise relative to interest rates in China, so Chinese residents seek to purchase additional U.S. financial assets.
  4. Chinese furniture manufacturers produce high quality early American furniture and successfully export large quantities of the furniture to the United States.