PADM 5006 Exam 1 Fall 2000

(R chapters 1-6, 8-12, T, handouts & ERP chapters 1 p. 37-40, Ch. 4, 5, & 7)

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. An editorial in the local newspaper argues that your job as a public administrator (and of all your colleagues) should be eliminated based on “economics”. The author argues that free market capitalism will promote efficiency and therefore your work is unnecessary and the public well being will be promoted by firing all of you. Using your background in public finance can you help educate the author and the public as to why some government involvement might be desirable even in a substantially market based economy? (Setting out under what circumstances he is “right” i.e. markets may work well, may help encourage him to consider when he could also be wrong.)

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

3. Al Gore has proposed increasing Medicare coverage to subsidize prescription drugs. In thinking about the effects of such a policy why should government officials care about the price elasticity of demand and supply for prescription drugs?

4. What’s the difference between a public good and a publicly provided good?

5. Suppose that a suggestion has been made to require Sacramento high school students to help clean up the American river. It’s argued this will reduce costs and can be conducted during regular school hours so that the students who have part time jobs won’t lose any money. It’s essentially “free labor” the proponents say since we won’t have to pay teachers any more to supervise this project than for their regular teaching. The teachers who will be required to supervise this project object. 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 do “adverse selection” and “moral hazard” imply with regard to private insurance provision?

How do these ideas relate to Medicare? How do they relate to unemployment insurance?

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

1. There is substantial concern that the use of fertilizers, pesticides, and fuel additives may be hurting water quality in the San Joaquin Valley. 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 water pollution? What are some of the advantages and disadvantages of alternative approaches?

2. Suppose Turlock is thinking about installing a “Light Guard system” that would light up the crosswalk when people press the crosswalk button at an intersection where pedestrian safety has been a concern. The system would cost $125,000 to install and $1,000 a year to maintain (which must be paid at the end of each year). About 1,000 people cross at this intersection twice a day Monday through Friday. The reduction in risk to life and limb to each is estimated to be small, about 1 in a million each time they cross. The interest rate is 10 percent.

a) Over the course of 1 year approximately how many lives would be saved by this project? Using a conservative estimate of the value of a “statistical life” as $3 million, what is the approximate present value of the project’s life saving benefits? Are there any other benefits you would want gather data on to consider in evaluating a project of this nature?

b) 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?

c) Suppose the technology cost $500,000 to install and even with the maintenance after three years it would have to be scrapped. The salvage value at that point is just equal to the costs of removal. What would the approximate present value of the project’s costs?

d) Using the original installation and maintenance information, now assume the estimates of the value of life and of costs such as installation and maintenance were estimated in current real terms, but the 10 percent interest rate had been in nominal terms. You expect 5 percent inflation. How would your estimates of the approximate present value of the project’s costs, benefits, and net present value change?

e) There’s another project that would benefit a different group of 1,000 people $100 each immediately at a total cost of $50,000. They argue since their project is less expensive and has a positive net present value that you should under take it. Unfortunately, due to insufficient budget you can only do one of the projects. What "distributional weight" would make you indifferent between the projects?