PADM 5006 Exam 1 Fall 2002

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

Part I (60 points): Please briefly explain your responses.

1. Housing costs have been rising rapidly. This may make it difficult for the poor to obtain decent housing. Someone suggests putting a cap on rental rates. Do you see any potential problems with this approach? (Note a sketch may help.)

2. What are some of the major criticisms of the definition of the poverty line used in the U.S.?

3. Recently the National Historic Lighthouse Preservation Act started giving away lighthouses to government agencies, nonprofit organizations, and community development organizations. It’s a competitive application process to see who will get the lighthouses based on their ability to care for the lighthouses and what they applicant organizations will do with the lighthouses. In what ways might a lighthouse be a public good (or near public good)? How has technology influenced whether or how a lighthouse fits this category?

4. If you were thinking about subsidizing a good, why would you care about the price elasticity of demand for the good and the elasticity of supply for the good?

5. Perro Gato and Chien Chat argue, “Pets are cute and raise people’s utility. Pets are correlated with increased life expectancy for their humans. Clearly pets provide positive externalities and so we should provide substantial subsidies for buying pets.” Please respond to their argument for funds from your limited budget.

6. What’s the difference between a social insurance program and an income redistribution program? (Please give an example of each and explain how the justifications differ.)

Part II (40 points): Please explain your responses fully and show your work.

1. Mercury occurs naturally, but is also used in mining and some industrial processes so that unusually high levels have sometimes occurred in some CA rivers. Mercury can be toxic and may have serious affects on the nervous systems of children. Why might it be desirable for the government to be involved in this issue? (Hint: please relate this issue to the Coase Theorem.) How could public policy be used to reduce the level of mercury in CA rivers? What are some of the advantages and disadvantages of alternative approaches?

2. Suppose Modesto is thinking about enhancing park facilities with an initial cost of $340,000 to install and $3,000 a year to maintain (which must be paid at the end of each year). About 10,000 people currently visit these parks about once each year and their enjoyment would be increased by about $1.00 on each visit. Another 5,000 that were reluctant to visit without these facilities will now also visit the parks about 10 times a year and receive about $1.00 worth of pleasure each time. The interest rate is 5 percent.

a) What is the approximate present value of the project’s costs? What is the approximate net present value of the project based on the data you have? Is the project admissible?

b) Suppose the maintenance cost estimates and benefit estimates were in current dollars and the interest rate of 5% was in nominal terms. Someone points out they expect 2% inflation. How would your estimates of the approximate present value of the project’s costs, benefits, and net present value change?

c) Suppose the facilities cost $340,000 to install, but even with the maintenance after three years they would have to be scrapped. What would be the approximate present value of the project’s costs?

d) There’s another project that would benefit a different group of 10,000 people $100 each immediately at a total cost of $600,000. Unfortunately, due to insufficient budget you can only do one of the projects. What "distributional weight" would make you indifferent between the original project in part “a)” and this new project?