PADM 5006 Exam 1 Fall 2013

Use separate sheets of paper as needed to answer.Please be sure to show all your work the part of the exam you are answering, and the number of the question you are answering.When done staple together all your work with this copy of the questions on front and hand them in.

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

1. In February 2013 Argentina announced a 2 month freeze on supermarket prices in an attempt to fight double digit inflation.This is essentially a price ceiling for supermarket products at their current price levels.(http://www.myfoxny.com/story/20958959/argentina-freezes-prices-to-break-inflation-spiral).

Do you see any problem with this strategy? Include a demand & supply sketch in your answer.

2. Why should you care about the elasticity of demand and elasticity of supply for a good you are considering taxing? Include a demand and supply sketch in your explanation.

3. Do you consider police department services a public good (or near public good)?Why or why not?

4. Avocados have been found to be high in nutrients that help in fighting diseases such as prostate cancer, oral cancer, and breast cancer, eye diseases, heart disease, and stroke. Suppose the Avocado Growers Association of California argues that since avocados clearly provide significant positive externalities your government agency should provide subsidies for avocados. Please respond to their argument for funds from your budget.

5. What is a shadow price?Why might you use a shadow price?Please include an example.

6. What's 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.

1.Coal is often burned to generate electricity. In the process it releases a variety of air pollutants such as sulfur dioxide which causes acid rain, particulate matter that exacerbates breathing problems, mercury which causes brain damage, and carbon dioxide which contributes to global climate change.These pollutants also contribute to thousands of premature deaths annually in the US. (http://ens-newswire.com/2013/09/04/air-pollution-blamed-for-200000-early-u-s-deaths-each-year/)

Based on the Coase Theorem, why might it be desirable for the government to be involved in this issue? What are some of the advantages and disadvantages of the 5 usual alternative approaches to dealing with externalities in terms of this case? Which would you recommend?

2.a) What is Social Security?

b) How does Social Security work?

c) Why are some problems with Social Security anticipated?

d) What are some alternatives for dealing with these problems?