Q1) In response to the intervention of the federal government in the aftermath of Hurricane Katrina, the New Orleans Mayor Ray Nagin considered supplementing the stock of federally-provided FEMA trailers in his city with trailers bought off the open market. The proposal involved buying 2,000 trailers from private companies at a price of $15,000 each. Assume that before Katrina 10,000 such trailers were bought and sold at a price of $14,000 each. After the Mayor's proposal, it is expected that private consumption will decrease to 9,500 trailers.
a) Draw a graph of the proposed policy change on the market for trailers.
b) Assuming that this is the only market affected by the policy change, calculate the net benefits of the policy change (a.k.a., the total value of this input) and show graphically.
c) Does this policy result in any transfers in the market for trailers? If so, calculate the value of all transfer(s) and identify which groups accrue the costs and benefits. If the policy does not result in any transfers, explain why you know this to be the case.
Q2) Consider the following data from a binary choice contingent valuation survey assessing the willingness to pay for a policy that would add black bears to the endangered species list.
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Stated Price (annual payment in $)
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Percent of respondents accepting price
|
|
400
|
2
|
|
300
|
15
|
|
200
|
34
|
|
100
|
58
|
|
0
|
90
|
a) Calculate the mean WTP of the sample.
b) Provide one reason why binary choice is better than closed-ended iterative bidding methods for determining WTP. Explain.
c) Provide one reason why someone who has never visited a wilderness area and never plans to, may still have a positive WTP for adding black bears to the endangered species list. Explain.
d) Explain the problem of hypotheticality in this survey. How (which direction) might it bias your estimates of WTP?
Q3) My friend, George, really likes beer. His demand for beer is given by: Q = 5 - 0.5P and the current price of a bottle of beer is $2.
a) Calculate George's price elasticity of demand for beer.
b) If the price increases to $4 per bottle, calculate George's compensating variation.
Q4) Assume that the National Park Service has a policy of setting the entrance fees for national parks (including Yosemite, the Grand Canyon, Yellowstone, etc.) equal to the marginal social cost of providing and maintaining park lands. Recent increases in the price of gas have caused the Park Service's costs to increase, resulting in a corresponding increase in the entrance fees for all national parks from $10 per vehicle to $25. With the $10 fee, 50 million vehicles entered the parks each year. Based on previous fee increases, the Park Service predicts that this new fee hike will result in a decline of 10 million vehicles per year.
a) Draw a graph of this policy change in the market for national parks.
b) Calculate and show graphically the change in social surplus in this market.
c) Assuming that this is the only market impacted by the policy change, calculate the net benefits of the policy change.
d) Your research indicates that the increase in price of national park visits will cause many families to switch from visiting national parks to visiting theme parks (e.g. Disneyland and Universal Studios). Assuming that the price of theme park admission does not change, draw a graph of the impact of the policy change on this market.
e) Does the theme park market experience a change in social surplus? If so, show it graphically. If not, explain why not.
f) Would you include the effects on the market for theme parks in your CBA? Why or why not? Explain and describe any assumptions you need to make.
Q5) The building of a new school will employ 500 construction workers. There is a minimum wage of $6/hour and unemployment is at roughly 11%, yielding 1500 unemployed workers in the economy. We also know that in the absence of the minimum wage, the equilibrium wage would be $4. Finally, we know that the building will require one year (i.e. 2000 hours) of these workers' full-time work.
a) Draw a graph reflecting the shift in demand for construction workers under this policy change.
b) What are government expenditures on construction workers? Calculate and show graphically.
c) Based on his article, "Evaluating Public Expenditures Under Conditions of Unemployment," what would Robert Haveman calculate as the opportunity cost (or value in the input market) of employing these workers? Explain.
d) Show graphically the opportunity cost of the workers using our "traditional" (or in-class) methods of finding the value of an input.
e) Even if we believe that the approach in part d) is appropriate, why might it yield inaccurate results?
Q6) When Medicare Part D (the policy to cover prescription drugs for seniors) was adopted, several different policy options were considered at the same time. Since Congresswas a proponent of cost-effectiveness analysis, its advisors came up with the following table quantifying the costs and lives saved under four different proposals.
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Proposal
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Cost ($bill)
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# Seniors Saved
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Cost-Effect
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Net Bens
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|
A
|
$50
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10,000
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$5 mill/senior
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0
|
|
B
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$200
|
50,000
|
$4 mill/senior
|
50 bill
|
|
C
|
$24
|
6,000
|
$4 mill/senior
|
6 bill
|
|
D
|
$64
|
8,000
|
$8 mill/senior
|
-24 bill
|
a) Calculate a cost-effectiveness ratio for each proposal. Which proposal is the most cost-effective?
b) One critique of cost-effectiveness analysis is that it masks issues of scale. Is this a problem in this analysis? Why or why not? Explain.
c) Assuming that lives saved are the only benefits of these proposals, calculate the net benefits of each, assuming a value of statistical life (VSL) of $5 million. Which proposal has the highest net benefits?
d) Calculate an estimate of the value of a life-year (VLY) implied by this VSL for the seniors who will be effected by this policy. Note any assumptions you need to make.
Q7) Consider the market for historically-preserved Victorian houses in San Francisco-a market that many argue is inefficient due to a positive externality in consumption (we all love to see them in pictures, postcards, walking by, etc). The city council is considering a per-unit subsidy on consumption to encourage more people to buy and maintain these homes to bring historical home ownership up to the socially optimal level.
a) Assuming an upward sloping supply curve, draw a graph of the policy change. Label the ideal size of the subsidy (S), the actual and optimal quantities of houses (Qa and Qo, respectively), and the effective prices that consumers and producers will see (Pc and Pp).
b) Show graphically the change in social surplus and indicate if positive or negative.
c) Show graphically the change in government revenue and indicate if positive or negative.
d) If this was the only market affected by the policy change, show graphically the net benefits of the policy and indicate if positive or negative.
Q8) Retrofitting (earthquake-proofing) the Golden Gate Bridge will cost society $220 mill (in real dollars all at the start of the first year), but the work is designed to last indefinitely without replacement or maintenance. The annual benefits will depend on the likelihood and magnitude of earthquakes. If no earthquakes occur in a year, then real annual benefits will be $-15 mill. If any number of small earthquakes, but no large earthquakes occur in a year, then real annual benefits will be $25 mill. If at least one large earthquake hits (and any number of other small or large), then the real annual benefits will be $200 mill. Historical records of the Bay Area show that over the last 100 years, there have been 60 years with no earthquakes, 38 years with small earthquakes only, and only 2 years with at least one large earthquake (1906 and 1989).
a) What are the expected annual benefits of the project?
b) For political reasons, the mayor of San Francisco is only concerned about the efficiency of the project over the next 3 years. Using a real social discount rate of 3%, calculate the expected net present value of the project for ONLY the first three years assuming that benefits accrue at the beginning of each year.
c) What is the total net present value of the project over its lifetime using a 3% real social discount rate?