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


PADM 5006 Exam 1 Fall 2005

Use separate sheets of paper as needed to answer. Please be sure to put your name on your answer sheets and the part of the exam you are answering and the number of the question you are answering. When done staple all your answer sheets and your exam together and hand them in.

Part I (60 points): Please briefly explain your responses.

1. San Joaquin leaders are interested in promoting economic growth and in encouraging more firms to locate in this area. Gasoline and other energy prices have been rising recently. A newly elected colleague suggests that San JoaquinCounty should put a cap on gasoline and other energy prices. He notes that during the electricity crisis in California several years ago some businesses wanted to relocate out of California because of the high prices. He argues the reverse would also be true. So by having lower energy and gas prices in San JoaquinCounty more businesses will locate here and this will stimulate economic growth. Several members of the public think his idea is brilliant and have sent in letters of support. Do you see any problems with his brilliant idea? (Please include a demand and supply sketch.)

2. Why might whether something is a public good influence whether it is publicly provided? Are there goods that are publicly provided that are not public goods?

3. What are some of the major criticisms of the definition of the poverty line used in the U.S.?

4. California grape growers point out that red wine has been found to reduce the chances of heart disease and heart attacks. According to the American Heart Association over 70 million Americans have some form of cardiovascular disease and over 7 million had heart attacks in 2002. Someone suggests encouraging more drinking of red wine would clearly provide positive externalities and so we should provide substantial subsidies for buying red wine. Please respond to this argument for funds from your limited budget.

5. Under the current and the previous governor of California a suggestion to require students to provide community services in order to graduate from state subsidized universities has been considered. It has been argued this will make it possible to undertake many more community projects and reduce costs since the labor will be essentially free. Suppose you are evaluating this proposal, in conducting your study how would you evaluate the costs of the labor? In your answer please also comment on the difference between on-budget costs and social costs.

6. Whats the difference between a social insurance program and an income redistribution program? Please give an example of each and explain how the justifications differ.

Part II (40 points): Please explain your responses fully and show your work.

1. Manure can generate unpleasant side effects in terms of smells, particulate matter in the air, and water contamination. 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) Why might it be desirable for the government to be involved in this issue? (Hint: please relate this issue to the Coase Theorem.) How else could public policy be used? What are some of the advantages and disadvantages of alternative approaches?

2. Suppose the city you work for is considering installing $275 million in sewer system repairs and improvements. Even once these changes are made another $1 million a year will be needed for maintenance. Fortunately, with proper maintenance this improved sewer system is expected to last forever. A survey of the approximately 2,000 large businesses in the area indicates they will each benefit from these more reliable sewer services by approximately $5,000 per year. Also about 100,000 residents will each benefit by approximately $500 each per year. The interest rate is 10 percent.

A) What is the approximate present value of the projects costs? What is the approximate present value of the projects benefits? What is the approximate net present value of the project based on the data you have? Is the project admissible?

B) Suppose the maintenance cost estimates and benefit estimates were in current dollars and the interest rate of 10% was in nominal terms. Your analysis suggests expected inflation is 5%. How would your estimates of the approximate present value of the projects costs, benefits, and net present value change?

C) If the sewer system repairs and improvements would only last for three years even with the maintenance, what would be the approximate present value of the projects costs?

D) Theres another project that would provide a net benefit of $250 each to a different group of 200,000 people immediately, but is unlikely to be provided in the absence of government intervention. Unfortunately, due to insufficient budget and political will you can only do one of the projects. Comparing the project described in A) and this project, in the absence of any other information about the people involved, which project should be preferred and why?

E) What "distributional weight" would make you indifferent between the original project in part A) and this new project?