PADM 5006 Exam 1 Fall 2010

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. Russia has experienced the worst drought in 50 years causing significantly reduced harvests and a dramatic rise in the prices of key foods. According to Bloomberg news they are considering setting price ceilings for 24 staple food items. (http://www.bloomberg.com/news/2010-09-14/russia-may-set-price-ceiling-for-staple-foods-as-drought-fuels-inflation.htmll) Do you see any problem with their strategy? Include a demand & supply sketch in your answer.

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. Do you consider Yosemite National Park a public good (or near public good)? Why or why not?

4. Pumpkins have been found to be high in nutrients that help in fighting diseases such as cancer, vision problems including cataracts, heart disease, Alzheimer’s disease, obesity, skin damage, high blood pressure, and stress. (http://www.suite101.com/content/health-benefits-of-pumpkin-a153140) Suppose the Pumpkin Growers Association argues that since pumpkins clearly provides significant positive externalities your government agency should provide subsidies for pumpkin growers. Please respond to their argument for funds from your budget.

5. What is a shadow price and why might you use a shadow price?

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. “In 1998, California identified diesel exhaust particulate matter (PM) as a toxic air contaminant based on its potential to cause cancer, premature death, and other health problems. Diesel engines also contribute to California's fine particulate matter (PM 2.5) air quality problems. Those most vulnerable are children whose lungs are still developing and the elderly who may have other serious health problems.” (http://www.arb.ca.gov/diesel/diesel.htm). Diesel is used by vehicles such as some cars, trucks, buses, tractors, and trains and in some construction equipment, marine vessels, generators, irrigation pumps, and refrigeration units. 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? Which would you recommend?

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?