PADM 5006 Exam 1 Fall 2001

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. What are some of the advantages of using markets to allocate goods and resources? When might they not work well?

2. Do you consider education a public good? Why or why not?

3. If the government decides to include prescription drug coverage under Medicare, how might this affect the market for prescription drugs? In thinking about the costs of such a policy why should government officials care about the price elasticity of demand and supply for prescription drugs?

4. Why give aid to the poor? Why do we care about the substitution effect when giving means tested aid to the poor? What were some of the modifications between AFDC and TANF?

5. A suggestion has been made to require students to provide community beautification services in order to graduate from CSU. It’s argued this will make it possible to undertake many more environmental enhancement 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 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. In California the government periodically requires auto emissions SMOG tests and remediation if a car pollutes “too much”. 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?

2. Suppose Stanislaus is thinking about enhancing park facilities with an initial cost of $200,000 to install and $1,000 a year to maintain (which must be paid at the end of each year). About 5,000 people currently visit these parks about 2 times each year and their enjoyment would be increased by about $1.00 on each visit. Another thousand that were reluctant to visit without these facilities will now also visit the parks about 10 times a year and receive about $1.00 worth of pleasure each time. The interest rate is 5 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 5% was in nominal terms. Someone points out they expect 3% inflation. How would your estimates of the approximate present value of the project’s costs, benefits, and net present value change?

c) Suppose the facilities cost $200,000 to install, but even with the maintenance after three years they 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? What would be the approximate present value of the project’s benefits? Is the project admissible?

d) 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?