Mock exam Flashcards
(a)̀ (1.5 points) Any policy change decided through the unanimity rule must correspond to an actual Pareto improvement.
Pareto improvement: change that makes one agent better off
without making any other agent worse off
True. If agents are rational and have access to all relevant information, a unanimous
choice means that all agents benefit from the policy change.
(1.5 points) Ordeal mechanisms are the best way of avoiding moral hazard in
poverty-alleviation programs
- Ordeal mechanisms, features of welfare programs that make them unattractive: if welfare programs are sufficiently unattractive, only the least able will want to sign up for them
- Moral hazard: the adverse behavior that is encouraged by insuring against an adverse event
Ordeal mechanisms (such as workfare) may be incorporated to avoid moral hazard.
The ordeals should be more costly to those who should not take advantage of the program (for instance, workfare requirements in poverty alleviation programs may
work if productivity is the main driver of low income but not if labor disutility is the main factor). But there are other possibilities of trying to avoid moral hazard, such as
focusing on categorical welfare programs (
programs that are restricted by some demographic characteristic, such as
single motherhood, disability)
(c) (1.5 points) If an allocation satisfies no-envy, it will satisfy no-domination.
True, if preferences are monotonic (more is better). If an allocation violates nodomination, then some agent is receiving less of all goods than another agent and will
envy that agent.
(d) (1.5 points) Women should contribute more than men for unemployment
insurance because the probability of unemployment is greater for women
It may be true that elasticity of labor supply is different according to gender, but that
in itself is a consequence of inequality (and it is also a generalization based on a
demographic characteristic that includes a large diversity of individuals). Fairness
concerns (namely Dworkin’s notion of compensation for different circumstancial
resources) would therefore work against this possibility.
Health insuranc ehsould not cover small expenses
The correct amount of insurance is defied by the trade-off between consumption-smoothing and the benefits this brings and unintended costs such as Moral Hazard.
The utility one, even a risk.averse agent, gains from being insured against minor medican events which result in small expenses is small, and roughly the same as the disutility to the individuals from
paying insurance premiums for small risk.
The second reason that the consumption-smoothing benefits of first-dollar coverage are small when medical spending is small and predictable
and that individuals are much more able to self-insure such spending than to self-insure large and unpredictable medical events.
Full-Insurance may bring
about moral-hazard in which individuals (consumers and providers of treatment) take
adverse actions in response to insurance (e.g. risky behaviour, over- treatment, overcharging)
(f) (1.5 points) If a government announces it will set Lindahl tax-prices to finance a
public good and tries to collect information on preferences, economic agents will
understate their valuations for the public good.
MY ANSWER: True, because Lindahl tax-prices tax individuals based on their WTP for the public good, as a way to finance public expenditure on that public good. Therefore, people have the incentive to report a wlower WTP in ordert to pay less.
THEIR ANSWER: Since Lindahl tax-prices are an example of benefit taxation, where agents are charged
according to the marginal benefits they derive from the public good, we would expect
agents to understate their valuations – and free ride, once more, with respect to the
public good. Access to information on individual valuations is, therefore, a barrier to
the application of Lindahl tax-prices.
A chemical producer dumps toxic waste into a river. The waste reduces the population
of fish, reducing profits for the local fishery industry by 150,000 per year. The firm
could eliminate the waste at a cost of 100,000 per year. The local fishing industry
consists of many small firms.
(1 points) Apply the Coase theorem to explain how costless bargaining could
lead to a socially efficient outcome, no matter to whom property rights are
assigned (either to the chemical firm or the fishing industry).
In this case eliminating the waste would be efficient because the benefits (150 000) of doing so are higher than the costs (10000).
If initial rights were asigned to the chemical producer, the producer would require a minimum oayment from the fishing industry to eliminate waist, which the fishermen wouyld be willing to pay 150 000. Therefore, a payment between 100 000 and 150 000 would take place (if costless bargaining was possible and waste would be liminated)
If property rights of the river were assigned to the fishing idustry, than the fishing industry would require a minimum payment of 150 000 to allow waste to be produced, but the firm would only be willing to pay 100 000. So no transaction would happen and waste would be eliminated.
A chemical producer dumps toxic waste into a river. The waste reduces the population
of fish, reducing profits for the local fishery industry by 150,000 per year. The firm
could eliminate the waste at a cost of 100,000 per year. The local fishing industry
consists of many small firms.
Verify the Coase theorem if the cost of eliminating the waste is
doubled to 200,000 (with the benefit for the fishing industry unchanged at
150,000).
Now, the costs of eliminating waste are 200 000, and the benefits for the local fishermen are 150 000, the benefits of eliminating the waste are lower than the costs of doing so,
it would be efficient not to eliminate the wast
Now, if initial rights were assigned to the chemical producer,the firm would require a minimum ppayment equal to 200 000 to eliminate the waste. However, the fishing industry wouldn’t be willing t pay that amount as the benfit they derive from having no waste is 150 000., they would be only WTP up to 150 000. So no transaction happens, and waste is not removed.
If property rights of the river are assigned to the fishing industry,the fishers would require a minimum of 150 000 to allow for the waste to be produced. The maximum amount that the the firm is willing to pay to remove dirt is 200 000, so a transaction betweem 150 000 and 200 000 would happen, payed by the firm if there is costless bargaining.
A chemical producer dumps toxic waste into a river. The waste reduces the population
of fish, reducing profits for the local fishery industry by 150,000 per year. The firm
could eliminate the waste at a cost of 100,000 per year. The local fishing industry
consists of many small firms
c) (1.5 points) Do you see any reasons why the Coase Theorem result might not
hold in this situation?
MY ANSWER: Yes, negotiation problems as the local fishing industry
consists of many small firms, and it’s hard to negotiate with many agents as they all have to agre qith eachother.
We can see this in for example the holdout problem, in case the property rights are held by the fishing industry, so a transaction wouldnt take place unless all fishermen agree, but then fishermen realize they have immens power as they realize steel plant cannot produce without his permission because he is a
part owner of the river. So they would have the incentive to not agree and try to raise their payment. But thi could happento all fishermen
As the local fishing industry consists of many small firms, transaction costs should not
be negligible.
Moreover, this fact also facilitates the existence of free-riding or hold-up problems
(among other problems).
There’s also the free riding ????’ problem- when an investment has a personal cost
but a common benefit, individuals will underinvest.
A chemical producer dumps toxic waste into a river. The waste reduces the population
of fish, reducing profits for the local fishery industry by 150,000 per year. The firm
could eliminate the waste at a cost of 100,000 per year. The local fishing industry
consists of many small firms
Suggest an alternative policy to internalize this externality,
discussing its advantages and problems (max. 8 lines
Many options here:
a Pigouvian tax imposed on the chemical producer, a
-quantity mandate,
- the creation of a market for pollution licences.
Advantages and disadvantages are connected to access to information (necessary for setting taxes and quantities),
flexibility under uncertainty (taxes allow for more flexibility than quantity intervention), and
the difficulties in setting up a market for pollution (including negotiation costs)
Assume that the government is planning to collect taxes on both capital and labor and that the deadweight loss of taxes collected on labor is the same as the deadweight loss of taxes on capital. Assume that the Government must collect a revenue of 20 monetary units.
a. (1.5 points) If the Government wants to maximize efficiency (subject to achieving
the desired revenue) what taxes should it charge?
MY ANSWER: WRONG It should charge a tax of 10 on capital market, and a tax of 10 in labour
Since the deadweight loss on both markets is similar, the Ramsey rule would
recommend taxing both in an equal way (to minimize the sum of the deadweight losses
that always vary more than proportionally with the tax rate)
Assume that the government is planning to collect taxes on both capital and labor and that the deadweight loss of taxes collected on labor is the same as the deadweight loss of taxes on capital. Assume that the Government must collect a revenue of 20 monetary units.
b. (1.5 points) Suppose now that the calculations of these deadweight losses apply to
the long run, but that in the short run the demand for capital is completely inelastic.
Should the government tax both capital and labor? Why or why not? (Max. 7 lines)
If the demand for capital is completely inelastic in the short run, the deadweight loss in
the capital market would be zero in the short run.
The decision depends on whether the
government should think about the long run deadweight loss and also on whether the concern of the government goes beyond efficiency and into fairness considerations
(where some might lead to sharing the tax burden between capital and labor).
Taking into account efficiency and equity concerns, discuss whether the provision of
education should rely on the Government, on the private sector, or on the private
sector with public financing. (max 25 lines).
MY ANSWER: The government has a lot to win with public provision of Education: more educated citizens,this translates in a higher rate of productivity, better educated children, will make better decisions for their future, better functioning of democcracy, more productive coworkers. However there is the risk of public education crowding out private education, since they can now spend a lot less on education just for a small decrease in the quality of education. There is a solution for this, vouchers as they put public and private eduation on equal foot and give consumer sovereignty to consuers. However, these may lead to segregation along many dimensions, such as race, income, child ability and lead to an inneficient and inequitable use of public resources, as they the government mihght be paying these vouchers that would choose private schoold either way. So my finl choice is free public education
THEIR ANSWER:
