Comprehensive Exam - Public Finance Section

1. Manure can generate unpleasant side effects in terms of smells, particulate matter in the air, water contamination, and even ozone damage. In an attempt to reduce these effects and produce more electricity some farmers are using containment areas and the methane gas from decomposing waste can also be captured and used to run electricity generators. According to a TID representative this could provide an almost endless supply of fuel in this dairy-rich region. (Modesto Bee 10/19/04, http://www.modbee.com/local/story/9305140p-10211546c.html). Some government grants have been made available to encourage construction of these containment and energy generation facilities.

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

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

b. Briefly explain an externality related economic rationale for government intervention.

c. Briefly explain the conceptual differences between the social costs or benefits and the on budget costs or benefits to government agencies that might be involved in this type of project.

d. Some taxpayers are not opposed to turning manure into electricity, but oppose any taxpayer funds for such proposals to encourage farmers to cleanup what they perceive as the farmers mess to begin with. Can you think of any alternatives other than subsidies that would encourage more farmers to consider building and using these facilities?

e. The state is very concerned about a substantial budget shortfall. Some have suggested putting a tax on electric utilities to fund this proposal. Briefly explain an efficiency related rationale for such a tax.

f. What would tend to determine the economic incidence of the tax?

g. Would a tax on electric utilities be progressive, regressive or proportional?

h. What are some alternatives you might consider for funding such a proposal, and why?

i. Some people may be hurt by the taxes and some people may benefit from the project. How does the Hicks-Kaldor criterion suggest you choose whether to undertake this project? Why might some disagree?

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

2. According to the NY Times flu kills about 36,000 people in the United States and hospitalizes another 200,000. Recently the U.S. made a deal to obtain Fluarix, the German-made flu vaccine. This means about 65 million doses of vaccine will be available. Unfortunately the CDC thinks about 98 million people in the U.S. really need it. (http://www.nytimes.com/aponline/health/AP-Flu-Vaccine.html).

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. Please discuss some of the key economic reasons that the government is involved in this issue.

b. Why has the government frequently subsidized the distribution of vaccine?

c. First assume there is no shortage of vaccine. If you were to do a benefit cost analysis of subsidizing the distribution of vaccine, what kinds of information would you want?

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. How would the current shortage change the nature of your benefit cost analysis?

f. 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.

g. What are some alternatives you might consider for funding your vaccinations, and why?

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

i. Children and the elderly are particularly vulnerable to illness. Many children live in poverty. Would this matter in designing your proposal and evaluating the benefits?

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