1. Since February 17, 2003 drivers into an 8 square mile of downtown London between 7 am and 6:30 pm have had to pay a £5 toll (about $8). A 90% discount is made for people living within the area and a 100% discount for disabled people and essential services. You can pay the toll daily, weekly, monthly, or annually by post, phone, computer, some shops or garages, etc. Automatic cameras keep track of the license plates of vehicles entering the area and if the tolls haven’t been paid an £80 fine will be issued.

Note this question has 10 parts intended to guide you in analyzing the proposed policy. If you think carefully each part can be concisely explained in a few sentences.

a. Think about some of the potential social benefits and costs of such a toll. If you were to do a benefit cost analysis of this policy what are some of the key data or information you would want to gather?

b. Briefly explain an externality related economic rationale for this policy.

c. Briefly explain the difference between on budget costs and off budget costs giving an example of each for this policy.

d. Many people are very upset by this toll. One bloke is particularly annoyed because the toll is only during the day and not charged on bank holidays. He complains that it’s not fair because they charge the toll exactly when he needs to go to work. He asks why they don’t just charge it on the weekends so it won’t hurt workers? Briefly explain why you think his modification to the policy should or should not be adopted.

e. Some people have suggested this toll will raise £150 million. Some say it will raise £130 million. Some say it will reduce congestion 10%, others say 15%, others say 20%. What factors would help you better estimate who’s right?

f. Some firms are complaining vehemently because they see this as effectively cutting into their business. Others wonder if this will shift congestion to the area around the congestion zone. How might this hurt some business property owners? How might this help some business property owners?

g. Over the next 10 years the funds gathered from this toll are intended to be used for improved public transportation. If this project were cancelled what would be some other alternatives you would consider to fund public transportation improvements?

h. Some people may be hurt by the toll and some people may benefit. How does the Hicks-Kaldor criterion suggest you choose whether to keep this policy? Why might some disagree?

i. What factors would influence the equity of the redistributional effects of this policy?

j. What level of government should handle this policy? (Briefly explain.)

2. A large portion ($3 billion) of President Bush’s National Energy Policy (NEP) is for consumer tax credits for the purchase of hybrid and fuel cell vehicles. There are also incentives for producing electricity in ways that are considered more environmentally friendly such as such as through wind and biomass.

Note this question has 10 parts intended to guide you in analyzing the proposed policy. If you think carefully each part can be concisely explained in a few sentences.

a. In designing a benefit cost analysis of this policy what are some of the key data or information you would want to gather?

b. Briefly explain an externality related economic rationale for the government tax credits.

c. Briefly explain the difference between the social costs and the on budget costs of this proposed policy.

d. Many people consider the $3 billion tax credits a lot of money. Are there other alternative strategies you might consider as part of the NEP? Why or why not?

e. Concerned about a budget shortfall someone has suggested instead putting a tax on new vehicles based on their fuel inefficiency and pollution production. How might this have similar effects? How might it differ?

f. Briefly explain an efficiency related rationale for instead taxing gasoline. (Hint: consider tax incidence and potential distortions to the economy.)

g. Burning biomass in electricity generation plants creates less particulate pollution than burning it out on the farms, however organic farming sometimes disks the biomass back into the soil. With this in mind briefly consider some of the pro and con reasons for subsidizing biomass electrical plants.

h. What would tend to determine the economic incidence of the credits?

i. What factors would influence the equity of the redistributional effects of the credits?

j. Does it make more sense for these policies to be handled at the federal or state level? (Briefly explain.)