PADM 5006 Exam 1 Fall 2007

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

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

1. Between September 2005 and May 2006 Hawaii required the Public Utilities Commission to calculate and publish the maximum pre-tax wholesale prices of gasoline that would be allowed. Gasoline is very expensive in Hawaii. Some people think they should have kept and perhaps even expanded these price caps to the retail market. Briefly explain including a demand & supply sketch a potential problem of setting such maximum prices.

2. Why should you care about the elasticity of demand and elasticity of supply for a good you are considering subsidizing? Include a demand and supply sketch in your explanation.

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

4. California grape growers point out that red wine has been found to reduce the chances of heart disease and heart attacks. According to the American Heart Association over 70 million Americans have some form of cardiovascular disease and over 7 million had heart attacks in 2002. Someone suggests encouraging more drinking of red wine would clearly provide positive externalities and so we should provide substantial subsidies for buying red wine. Please respond to this argument for funds from your limited budget.

5. It is getting difficult for the army to recruit more soldiers. One strategy would be to raise the pay and benefits to attract more recruits. This would imply more taxes. We could implement a draft and not raise the pay or benefits to avoid having to raise taxes quite so much. Suppose you are evaluating the costs of using a draft versus raising pay and benefits, in conducting your study how would you evaluate the costs of the new recruits? 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.

1. California is the largest dairy producer in the U.S.. Our 1.5 million cows make about 30 million tons of manure per year. Although this can be a great fertilizer runoff can pollute waterways (leading to fish kills and unsafe drinking water) and the methane gas from decomposing waste adds to smog, causing respiratory problems such as asthma, and exacerbating global warming. Expensive methane digesters can capture the methane and use it to generate electricity (http://www.cawrecycles.org/issues/dairy_waste) Based on the Coase Theorem, why might it be desirable for the government to be involved in this issue? What are some of the advantages and disadvantages of the 5 usual alternative approaches to dealing with externalities in terms of this case?

2. a) What is Social Security?

b) How does Social Security work?
c) Why are some problems with Social Security anticipated?
d) What are some alternatives for dealing with these problems?