Answer all questions separtely!

1. It has been asserted that medical research conducted at a University in Denver generates positive externalities, some of which are for residents of that area, and additional externalities for the country as a whole (from research).

a.) Should the city of Denver subsidize medical research in the Medical Campus? If so, how would you determine the optimal level of the subsidy? Illustrate graphically. Is the optimal subsidy for the city of Denver the same as the optimal subsidy for the country as a whole? Why or why not?

b.) How would the city of Denver be better off if it implemented the subsidy? Don't forget the subsidy will have to be paid out of taxes on the local citizens.

2. The governor of the state is proposing that Colorado give an extra $4,000 per student to schools in the state where the average income is below average (so half the schools) (in Colorado Springs the average school spends about $15,000 per student). When questioned about the fairness of excluding the other half, the governor says they can always go to private school.

a.) First, evaluate the governor's proposal for efficiency. Will the proposal get the state closer to Q , which is the socially optimal quantity of education? Why or why not?

b.)Evaluate the statement about private schools. Will the number of children attending private school rise or fall (that is, do public schools crowd out private schools)? Why?

c.) Would your answer to b. be different if the $4,000 per student were granted to schools in the upper half of the income distribution? Why or why not?

3. The El Paso County government has decided that internet services are a vital part of the infrastructure for the modern world. It has therefore proposed to build a wireless internet across the county, where all people below two times the poverty line will get free wireless. Others can join, but will have to pay a monthly fee.

a.) Will low income people be better off by this program of free wireless?

b.) Would low income people prefer a direct cash transfer, or free wireless? Would taxpayers?

c.) Will El Paso County as a whole be better off from this program? Why or why not?

4. The town of Black Forest near Colorado Springs has decided to build a community swimming pool. To pay for the upkeep as well as the initial construction costs, the town council has proposed to increase property taxes.

a.) Is a community swimming pool a public good? Why or why not? What else would you need to know to make a final determination?

b.) Is the community swimming pool going to be the socially optimal size? Why or why not, or what would you need to know?