PADM 5006 Exam 1 B

Fall 1999

Show and Label all work.

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

1. Agree, agree with provisions, or disagree with the following statement and explain your answer.

"Most economists favor efficiency as an economic goal and therefore favor free markets instead of government intervention."

2. In what ways might local fire protection services be considered a public good (or near public good)? In the absence of government do you believe that private markets will provide fire protection services?

3. Suppose you are considering a proposal to subsidize vaccinations, why might you care about the price elasticity of demand and supply for vaccinations? (Hint: A couple of sketches might help you illustrate your response effectively.)

4. What's the difference between public provision of a good and public production of a good?What factors would tend to influence the choice between public production and private production of a publicly provided good?

5.Governor Gray Davis has suggested adding a requirement to graduate from a state supported school that students do "volunteer" service.He argues this requirement would have many social benefits. Suppose you are evaluating this proposal, and assuming you accept the governor's benefit estimates, in conducting your study how would you evaluate the costs of these "free" volunteers?(Hint: In your answer please comment on the difference between "on-budget costs" and social costs.)

6. If people really value insurance why might private markets tend to under provide some types of insurance? Give some examples of social insurance programs that help get around these problems.

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

1. There is substantial concern that the use of fertilizers, pesticides, and fuel additives may be hurting water quality in the San Joaquin Valley.Why might it be desirable for the government to be involved in this issue? (Hint: please relate this issue to the Coase Theorem.)How could public policy be used to reduce the level of water pollution?What are some of the advantages and disadvantages of alternative approaches?

2. Suppose Modesto is thinking about planting flowers in local parks that would cost $18,000 in supplies and labor to plant and $200 per year (at the end of each year) to maintain.Unfortunately, park visitors are tough on flowers so even with the maintenance after four years the flowers will die out.

A survey of the approximately 100 current weekly park visitors indicates that this would probably increase the value of their visits by about $0.50 per visit and the number of their visits would approximately double.Also about 100 potential visitors indicate they would be likely to go to the park occasionally over the course of the summer (ie. about 10 times per year) if there were these attractive flowers and that each visit would be worth about $0.50.The interest rate is 10 percent.

a)What is the approximate present value of the project's benefits?What is the approximate present value of the project's costs? What is the approximate net present value of the project?Is the project admissible?

b)Now assume the estimates of the value per visit people gave you were in current real terms, but the 10 percent interest rate had been in nominal terms and you expect 5 percent inflation.How would your answers change?

c)How would your answers change if the flowers would last forever so long as the $200 maintenance is done each year?

d)Suppose someone argues that this park is in a poor neighborhood and therefore a "distributional weight" of 2 should be applied to the benefits while the costs would be obtained from other members of society. Would this change your decision about whether to recommend providing the flowers?