Comprehensive Exam - Public Finance Section

1. According to the President Bush as part of the Energy Independence and Security Act of 2007 we will spend $1.2 billion over five years to help move hydrogen-powered cars from the research lab to the dealership lot. (http://www.whitehouse.gov/news/releases/2005/03/20050309-5.html).

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 the hydrogen powered car policy what are some of the key data or information you would want to gather?

b. Once you have the information you would use in a benefit cost analysis how would you handle benefits and costs that occur in different periods of time?

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

d. Briefly explain the difference between social costs, on budget costs, and off budget costs using examples for this policy.

e. What would tend to determine the economic incidence of the $1.2 billion in spending?

f. Concerned about the budget deficit 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?

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

h. What factors would influence the equity of the redistributional effects of a gas tax?

i. The act also requires: more biofuel from fuel producers, raising fuel economy of cars to 35 mpg, and increased energy efficiency in appliances. With this in mind briefly consider some of the pro and con reasons for command and control strategies.

j. Does it make more sense for this project to be handled at the federal, state, or local level? Why?

2. Suppose a community group proposes the city should build a natural science museum. They point out that this would provide educational benefits to local residents, be a tourist site that would stimulate demand for other businesses in the area, and therefore also generate additional sales tax revenues. Since surveys of area residents indicate that education is a top priority they argue this project should clearly be undertaken.

Note this question has 10 parts. If you think carefully each part can be concisely explained in a few sentences using concepts and principles developed by public finance economists.

a. Do you see any problems with the community groups analysis so far?

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

c. Briefly explain a public finance rationale for government intervention.

d. Once you have the information you would use in a benefit cost analysis how would you handle benefits and costs that occur in different periods of time?

e. Does it matter that some benefits or costs may be on-budget or off-budget items? Be sure to give an example of each to illustrate your explanation.

f. What are some alternatives you might consider for funding this project, and why?

g. Suppose a general sales tax is used. What would be the likely incidence of such a tax?

h. Suppose property taxes are used. What would be the likely incidence of such a tax?

i. Would the socioeconomic characteristics of the people in the neighborhood that receives the museum matter in designing your proposal and evaluating the benefits?

j. Does it make more sense for this project to be handled at the federal, state, or local level? Why?