PADM 5006 Exam 1 Fall 2003

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. About 16% of people in the U.S. don’t have health insurance. A proposal is brought to you arguing this is because health insurance is too expensive. They argue since people need to be able to buy health insurance we should put a cap on the price of health insurance. Do you see any problems? (Please include a demand and supply sketch.)

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

3. Global positioning satellite signals are now often used to determine locations. In what ways might satellite signals be a public good (or near public good)? How does technology influence whether a good fits this category?

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

5. Richard Simmons argues, “Obesity in America is a serious health problem that could be reduced through more exercise.  More exercise is correlated with increased life expectancy.  Clearly exercise provides positive externalities and so we should provide substantial subsidies for buying exercise videos and athletic equipment.”  Please respond to his 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. According to a PPIC survey 75% of people in the Central Valley consider air pollution a problem and 40% either have a respiratory problem or family member with a respiratory problem. Recently to reduce air pollution the government has offered subsidies to purchase “Zero emission” and hybrid reduced emission vehicles. Why might it be desirable for the government to be involved in this issue? (Hint: please relate this issue to the Coase Theorem.) How else could public policy be used to reduce the level of pollution? What are some of the advantages and disadvantages of alternative approaches compared to the subsidies?

2. Suppose the city you work for is considering building a community youth center. The initial cost of the building and land is estimated at $1 million. Staffing and maintenance are estimated at $100,000 a year. The city has about 7,000 young people and the level and approximate makeup of the youth population is expected to stay the same over time. About 1,000 youths would use the community center every weekday and would value these visits at $1 each. Another 1,000 youths would use the community center twice per year and value each visit at $10 each. The other 5,000 youths have about a 10% probability of going to community center once a year and value each visit at $10. The interest rate is 10 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 10% was in nominal terms. Your analysis suggests expected inflation is 5%. How would your estimates of the approximate present value of the project’s costs, benefits, and net present value change?

c) Suppose instead we could use less expensive modular construction that costs $300,000 to install, but it is in a tough neighborhood and less sturdy materials so even with the maintenance after 3 years the building 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 $125 each immediately at a total cost of $1million now. Unfortunately, due to insufficient budget and political will 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?