Comprehensive Exam - Public Finance Section

1. An energy company is planning to build a power plant in eastern Alameda County, which would generate enough electricity to power about 96% of the homes in Alameda and Contra Costa counties. However some people in San Joaquin have objected because the plant will produce about 509 tons of potentially harmful air pollutants each year, which are likely to affect them. San Joaquin has so far failed to stop the plan. However the plant will need water from San Joaquin. Some have argued that by requiring the water to come from the other side of the county they may be able to effectively get the company to pay for infrastructure that will help irrigate some public areas like parks.

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

a. In designing a benefit cost analysis of this proposed plant what are some of the key data or information you would want to gather in deciding whether to intervene at all?

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

c. Briefly explain the conceptual differences between the social costs, the firms private costs and the on budget costs of public agencies that might become involved.

d. News reports indicate the energy company has bought tradeable credits from other firms earned for pollution reduced in the Bay area. What does this mean? Why would this happen?

e. The state is very concerned about a substantial budget shortfall. Someone has suggested instead putting a tax on new power plants based on their pollution production. How might this have similar effects? How might it differ?

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

g. What would tend to determine the economic incidence of the tax? Would it be progressive, regressive or proportional?

h. Suppose the firm suggests we should subsidize equipment to help produce the power with less pollution. What ate some of the advantages and disadvantages to such an approach from a public finance perspective?

i. Why would San Joaquin care about irrigating parks?

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

2. Numerous accidents have occurred on Lake Road in Stanislaus County. This road has many curves, followed by curves, a dip followed by an immediate turn, phone polls with crosses commemorating accident victims, and it floods. It is heavily used in the summer by people traveling to Turlock Lake for recreation and sometimes on their way back their driving skills are impaired. However it is not used much in winter. Most of the surrounding land is occupied by farms and vineyards. Some people have proposed the road be widened and better lit to promote safety.

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 using concepts and principles developed by public finance economists.

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

b. 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.

c. Suppose some farm owners on the road oppose the project because it may require use of some of their land. How might you address their claims of inequity?

d. Increased travel may also increase air and noise pollution. Does this imply further government intervention? Why or why not?

e. What are some alternatives you would consider for funding such a project, and why?

f. Are there any advantages or disadvantages from an efficiency perspective to a road user fee?

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

h. Some argue these taxes (user fees and gasoline taxes) particularly hurt the poor. Why might this be true? Why might it not be true?

i. How might you reduce the impact of these taxes on the poor? Are there any likely drawbacks to your plan?

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