PADM 5006 Exam 1 Fall 2004

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. Gasoline prices have been rising. Some people have suggested the government should impose a price cap. Do you see any problems? (Please include a demand and supply sketch.) What about restrictions on price gouging such as in Florida after the 3 recent hurricanes? Would the substantial difference between the long run elasticity of supply and the short run elasticity of supply influence your opinion? Why or why not?

2. Why might whether something is a public good influence whether it is publicly provided? Are there goods that are publicly provided that are not public goods?

3. Eric and Donna participate in a small isolated economy with fixed endowments.  There are 5 cans of root beer and 4 pizzas. They both like root beer and pizza a lot and are very hungry.

A) Draw an Edgeworth box for this small economy.

B) Depict an allocation where Donna has all the root beer and all the pizza and label it B.

C) Depict an allocation where Eric has all the root beer and all the pizza and label it C.

D) Are either of these Pareto Efficient?

E) Are either of these equitable?

4. California dairy producers are concerned about the well being of the poor, about encouraging healthy eating, and also promoting stability in dairy markets. They point out that cheese can provide a high source of protein and calcium that is particularly good for growing children. They would like to make an agreement to sell cheese to the government at a fixed price in years in which there is a market surplus. They argue this would help stabilize the cheese market and since the costs to the government would be completely offset by the benefits to the poor who receive the cheese this is clearly a win-win program. Please briefly explain any potential problems you see with their proposal. In particular how might this affect the supply of cheese and how might this in-kind gift to help the poor compare to a cash subsidy?

5. Under Governor Schwarzenegger a suggestion to require students to provide community services in order to graduate from state subsidized universities is being reconsidered.  It’s argued this will make it possible to undertake many more community projects and reduce costs since the labor will be essentially “free”.  Suppose you are evaluating this proposal, in conducting your study how would you evaluate the costs of the labor?  (Hint: In your answer please comment on the difference between “on-budget costs” and social costs.)

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. Manure can generate unpleasant side effects in terms of smells, particulate matter in the air, and water contamination. In an attempt to reduce these effects and produce more electricity some farmers are using containment areas and the methane gas from decomposing waste can also be captured and used to run electricity generators. According to a TID representative this could provide “an almost endless supply of fuel in this dairy-rich region.” (Modesto Bee 10/19/04, http://www.modbee.com/local/story/9305140p-10211546c.html) 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? What are some of the advantages and disadvantages of alternative approaches?

2. Suppose the city you work for is considering adding playground equipment to a local park that would cost $15,000 in labor and equipment outlays to install and $500 per year to maintain. Fortunately, with proper maintenance this new super sturdy the playground equipment is expected to last forever. A survey of the approximately 200 current weekly park visitors indicates that this would probably increase the value of their visits by about $0.50 per visit and the number of their visits would approximately double to twice a week. Also about 100 potential visitors indicate they would be likely to go to the park occasionally over the course of the summer (ie. about 10 times per year) if there were playground equipment and that each visit would be worth about $1.00. The interest rate is 10 percent.

A) What is the approximate present value of the project’s costs? What is the approximate present value of the project’s benefits? 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) What if the playground equipment cost $15,000 in labor and equipment outlays to install and $500 per year to maintain (paid at the end of each year), but the equipment is not so sturdy so even with the maintenance after two years the playground equipment would have to be scrapped. The salvage value at that point is just equal to the costs of removal. What would be the approximate present value of the project’s costs?

D) There’s another project that would benefit a different group of 100 people $200 each immediately at a total cost of $11,000 now, which would be collected from the same 100 people via a tax, but is also unlikely to be provided in the absence of government intervention. 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?