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

  1. Recently OPEC decided to restrict overall oil production. Since oil is a key input in gasoline production this has caused the price of gasoline in the United States to increase dramatically. President Clinton has been considering reducing the gasoline taxes. This has increased interest in these particular taxes substantially.

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

  1. Briefly explain an externality related economic rationale for the government tax on gasoline.
  2. Briefly explain an equity related rationale for the government tax on gasoline.
  3. Briefly explain an efficiency related rationale for the government tax on gasoline, other than your externality argument. (Hint: consider tax incidence and potential distortions to the economy.)
  4. Some argue these taxes particularly hurt the poor. Why might this be true? Why might it not be true?
  5. How might you reduce the impact of these taxes on the poor? Are there any likely drawbacks to your plan?
  6. In the absence of these taxes to fund highway projects what do you expect to occur?
  7. Suppose you were designing a quick cost benefit analysis of the proposed change in tax policy. What is some of the key information would you want to gather?
  8. Briefly explain the difference between the social costs and the on budget costs of this proposed tax change.
  9. Could a road user fee adequately substitute for the gasoline tax? (Briefly explain.)
  10. Does it make more sense for these policies to be handled at the federal or state level? (Briefly explain.)