PADM 5006 Final Exam Fall 2010

Use separate sheets of paper as needed to answer. Please be sure to put your name on your answer sheets and the number of the question you are answering. When done staple all your answer sheets and your exam together and hand them in.

Please explain your responses.

Part I (20 points each)

1. For 15 years people in Woodland Park have been debating whether to build a community recreation center with a gym, pool, track, and other fun features. It would cost $14 million to build. Some say it would raise property values and so raise tax revenues, increase local health, generate jobs and a multiplier effect so everyone would benefit. They point out that during the current recession the construction will be cheaper and suggest using a 1 percent increase in the sales tax to pay for the center.

a) Do you see any problems with this analysis so far?

b) What other kinds of information would you want or need to carry out a benefit cost analysis

c) Once you have the information you would use in a benefit cost analysis how would you handle benefits and costs that occur in different periods of time?

2. Which of the following would you classify as a public good or private good? Briefly, why?

a) National Defense

b) Coffee

c) Harry Potter Park at Universal Studios

d) On-line libraries

e) Local Library

f) Public health clinic

g) Vector Control (Mosquito Abatement)

h) Highway

i) Air

j) Cookies

3. The California Air Resources Board is considering allowing more years for diesel trucks and other equipment to comply with clean air regulations and reducing other requirements because of concerns about the effects the restrictions may have on businesses. Others argue that this will lead to more respiratory deaths in California and hurt the clean technology sector. (http://californiawatch.org/dailyreport/state-rolls-back-diesel-pollution-limits-7356)

a) Why might it be desirable to have government involvement? (Please relate this issue to the Coase Theorem.) 

b) How could public policy be used to reduce the level of diesel soot in the air? 

c) What are some of the advantages and disadvantages of alternative approaches?

d) What level of government is appropriate for some of these different approaches and why?

4. A new 10% federal tax on indoor UV light tanning services started this summer. It may generate $2.7 billion over the next ten years which will be used to help pay for the health care reform bill. UV tanning was targeted because it is associated with raising the risk of melanoma. (http://www.cbsnews.com/stories/2010/06/30/eveningnews/main6635131.shtml, http://www.kbtx.com/home/headlines/97715629.html).

a) Please discuss this proposal using some of the criteria from public finance for evaluating a tax. Be sure to include definitions of the key terms used in your arguments.

b) What influences on the magnitude of excess burden might come into play with this tax?

Part II (10 points each)

1. Please explain how the adverse selection and moral hazard relate to social insurance programs.

2. A key characteristic of perfectly competitive industries is that firms can enter and exit relatively easily. What does this imply for the long run elasticity of supply in a perfectly competitive industry? Why should public administrators care about this information when considering taxing a perfectly competitive industry?