PADM 5006 Final Exam Fall 2008

Use separate sheets of paper as needed to answer.  Please be sure to put your name on your answer sheets and the number of the question you are answering.  When done staple all your answer sheets and your exam together and hand them in.


Please explain your responses.

Part I (20 points each)

1. Proposal: “A metro (subway system) would reduce traffic and thus pollution and accidents and so save lives.  Since human lives are infinitely valuable this project should clearly be undertaken.  Having a metro system will also facilitate trade and promote growth in the area and will also increase local property values and thus local property tax revenues. Since there will be multiplier effects the benefits will extend to everyone so clearly this project should be undertaken.”

a)      Do you see any problems with this analysis so far?

b)      What other kinds of information would you want to carry out a benefit cost analysis

c)      Once you have the information you would use in a benefit cost analysis how would you handle benefits and costs that occur in different periods of time?


2.      Which of the following would you classify as a public good or private good?  Briefly, why?

a)      Candy canes

b)      Concert at Gallo Arts Center

c)      Concert in a park

d)      National defense

e)      Celebration of light holiday parade downtown

f)        Public health clinic

g)      Police services

h)      Highway

i)        Fourth of July Fireworks display

j)        Salvation Army gift boxes of food for distribution to needy families


3.  People in eastern Pennsylvania and in other neighboring northeastern coastal areas live where “federal air quality standards are not met, facing increased risks of heart and lung disease and premature mortality” (  The Pennsylvania “Governor announced that 81 businesses statewide will use more than $454,000 in state investments to purchase equipment that will increase energy efficiency or prevent pollution while adding to profitability.” (

a)      Why might it be desirable to have this type of government involvement? (Please relate this issue to the Coase Theorem.) 

b)      How else could public policy be used to reduce the level of air pollution? 

c)      What are some of the advantages and disadvantages of alternative approaches?

d)      What level of government is appropriate for some of these different approaches and why?


4. Suppose someone suggests: "Only people with high incomes buy lobster, therefore we should tax lobster.  That way the tax will be fair since it will fall on those with the greatest ability to pay.  It will also be efficient since lobster is perishable and so people won’t drive long distances to avoid the tax.”

a)      Please discuss this proposal using some of the criteria from public finance for evaluating a tax.  Be sure to include definitions of the key terms used in your arguments.

b)      What influences on the magnitude of excess burden might come into play with this tax?


 Part II (10 points each)

1. Please explain how the adverse selection and moral hazard relate to social insurance programs.

2. A key characteristic of perfectly competitive industries is that firms can enter and exit relatively easily. What does this imply for the long run elasticity of supply in a perfectly competitive industry? Why should public administrators care about this information when considering taxing a perfectly competitive industry?