Economics 275/Political Science 218 Public Economics Spring 2012 First Midterm February 13 201!

"ou need t#o blue boo$s% Please put t&e 'uestions 1() in t&e *irst blue boo$ and 'uestions 7(11 in t&e second% "ou &a+e 75 minutes to complete t&e e,am% -o boo$s notes or calculators may be consulted% .&ere calculations are in+ol+ed s&o# all #or$% Part / For eac& o* t&e e,amples belo# please ans#er t&e *ollo#ing0 1% 2oes an e,ternality e,ist3 /* so classi*y t&e e,ternality as positi+e/negati+e 4or bot&5% 6% /* an e,ternality e,ists determine #&et&er t&e 7oase t&eorem applies% 7% /* an e,ternality e,ists and t&e 7oase t&eorem does not apply argue #&ic& o* t&e go+ernment8s tools are best suited to address t&e issue0 'uantity regulation ta,/subsidies tradable permits or somet&ing else% 15 25 Some users install a &idden c&ip in t&eir computers t&at allo# t&ose computers to be trac$ed i* stolen% 410 points5 1 pri+ate indi+idual constructs a lig&t&ouse9a structure designed to emit lig&t t&at s&ips use *or na+igation% 410 points5

Part //0 :&e city o* "alia 4population 20 0005 is considering de+eloping a large public par$ *or its residents% /ts sister city Salia 4population 10 0005 de+eloped a par$ *or its residence in 2011% :&e *ollo#ing c&art s&o#s &ouse prices in "alia and Salia o+er time% ;ousing Prices Salia 200 <100 00 8 0 201 <120 00 0 0 201 <150 00 2 0 "alia <180 000 <200 000 <220 000

:&e main bene*it o* building t&e par$ is t&e leisure +alue it pro+ides *or residents% 35 !5 55 =se t&e data abo+e to pro+ide your best estimate o* t&at +alue% 410 points5 2escribe t&e $ey assumption *or t&e +alidity o* your estimate% 45 points5 Pro+ide e+idence o* t&e +alidity o* your estimate% 45 points5

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Pro+ide an argument *or #&y your estimate may still not be +alid despite t&is additional e+idence% 6e sure to pro+ide a speci*ic e,ample o* a scenario in #&ic& t&e assumption #ould not be +alid% 410 points5 (Exam continues on next page.)

=SE 1 SEP1>1:E 6?=E 6@@A F@> :;E B=ES:/@-S @- :;/S P1CE Part // 7ontinued0 .&et&er or not to build a par$ &as become a contentious issue in "alia% 1ssess t&e +alidity o* t&e *ollo#ing arguments0 75 Proponents argue t&at $ids #ill play outside more i* t&e par$ is built and t&at t&ere*ore t&e c&ildren #ill be &ealt&ier as a result% .ould &ealt&ier c&ildren be an additional 4abo+e and beyond your estimate *rom part )5 economic bene*it in a cost(bene*it analysis o* t&e proDect3 .&y or #&y not3 410 points5 @pponents argue t&at it #ould be better i* t&e land #ere sold to pri+ate business to de+elop% 4:&e money *rom t&e sale could be used *or anot&er proDect suc& as buying more computers *or sc&ools%5 .ould t&e *oregone re+enue 4*rom not selling t&e land5 be an economic cost in a cost(bene*it analysis o* building t&e par$3 .&y or #&y not3 410 points5 @t&er opponents argue t&at t&e city s&ould not build a par$ because par$s are more e**iciently pro+ided at t&e state le+el% 2o you agree #it& t&is argument3 .&y or #&y not3 410 points5

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:&e mayor o* "alia is an accountant and is distrust*ul o* cost bene*it analysis% ;e is con*ident o* t&e cost o* building a par$ but is uncertain as to &o# muc& &is constituents #ould +alue it% ;e as$s &is ad+isers to suggest ot&er mec&anisms by #&ic& &e can decide #&et&er to build t&e par$ or not% For eac& mec&anism e,plain0 1% /s t&e mec&anism li$ely to lead to t&e e**icient outcome3 .&y or #&y not3 6% =nder #&at conditions #ill t&e mec&anism lead to 4or be more li$ely to lead to5 t&e e**icient outcome3 105 1llo# t&e public to +ote yes or no on a proposal to ta, eac& o* t&e - "alia residents 1/- o* t&e cost and to build t&e par$ #it& t&e ta, money% 6uild t&e par$ only i* a maDority o* t&e residents +ote yes% 410 points5 1s$ t&e public *or contributions% 6uild t&e par$ only i* more contributions come in t&an t&e cost o* building t&e par$% 410 points5

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