ECON 5050 Practice Exam 1 (W&W chapters 1,2,3,10,11,12,13,14& ERP chapters 4,5,6)

1. The Big Dig, also known as the Central Artery/Tunnel Project (CA/T) is intended to alleviate serious bumper to bumper traffic jams, accommodate growing traffic needs (245,000 cars/day by 2010 vs. 190,000 cars today), and reduce the high rate of accidents (4 x the national average for city highways) on the current central artery in Boston by building a new central artery beneath the old. (http://www.bigdig.com)

Note this question has 10 parts intended to guide you in analyzing some aspects of this project. 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 project 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. Some of the dirt from the Big Dig was used to cap a dump and turn it into a park. The project will also create 150 acres of new parks. Does this fit a public finance argument for government intervention? Why or Why not?

d. Smoother traffic flow may also decrease air and noise pollution. (For example they estimate a 12% reduction in carbon monoxide pollution despite greater traffic flow.) Does this imply further reason for government intervention? Why or why not?

e. The Big Dig is infamous for huge upward cost revisions. In evaluating the costs of the project how could you try to account for the risk that it might cost billions of dollars more than your first estimate?

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

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

h. Some argue for taxes on visitors, such as car rental taxes, extra conference fees, and hotel taxes. They say that way the burden will be born by people from outside of Boston. Why might this be true? Why might it not be true?

i. In the wake of Sept. 11 some hotels and restaurants have made cutbacks as demand has declined. Many people who work in hotels and restaurants have relatively low income. Would this matter in deciding how to fund the project?

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

2. Alice says: We should require by law that everyone get a flu vaccination. Flu vaccinations save lives and promote the public health. Life and health are infinitely valuable so we must do everything possible to get everyone vaccinated. Besides over half of all healthcare expenditures come from government funds so this will save resources in the long run since fewer people will need treatment for the serious versions of this illness that can arise.

Bob says: Freedom is whats infinitely valuable, including freedom from meddlesome laws and needles. Any government intervention is completely unjustified. Viva Laissez faire!

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. Comment on any problems you see to each sides analysis thus far.

b. Discuss a negative externality and a positive externality public finance argument for government intervention.

c. Suggest an alternative proposal to Alice & Bobs views that you might consider.

d. If you were to do a benefit cost analysis of your proposal, what additional kinds of information would you want?

e. 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?

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 project, 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?