Public Economics exam

Midterm Exam

Econ 421 - Spring 2015

Name:

Please complete your own work. Do not cheat.

This test is out of 100 points, and I expect the exam to take you about 90 minutes. The points allocated to each question are listed below. The number of minutes you should expect to spend on each question is listed in the final column.

Question	Points	Minutes
1	25	18.75
2	15	11.25
3	30	22.5
4	30	22.5
Total	100	75

Even though I expect the exam to take about 75 minutes, you have a four hour window to complete this exam. The exam will be posted to the course website on March 16th at 4pm and exams are due by 8:05pm that same day. No late exams will be accepted. If you are cutting it close, i suggest uploading something by 7pm, and then attepting to finish before re-uploading. Do not risk uploading nothing.

1. Consider a Steel producer with the cost function given by

Cost = 50 + 5Q2

a. I f market price of steel is $5 per unit, find the firms optimal quantity and maximum profit level.

b. Suppose that each unit of steel production produces 2 units of pollution. Suppose further that scientists have conducted a study on similar steel factory pollution and determined that pollution is related to days missed from work according to the following equation

Sick Days = 0.6(Pollution)+10

Assuming the daily wage is $10 what is the marginal social cost of the pollution?

c. What is the total social cost of pollution when the firm considers only its private costs.

d. What is the optimal per unit tax on pollution for this steel factory. Why? Show using a well labeled graph that your tax will achieve a socially optimal level of output.

2. Define Efficiency in an economic context. Explain how this can be used to compare different governmental institutions.

3. State a condition for total market pareto equilibrium (i.e. that there are no remaining gains from trade in the economy). Explain in as much detail as possible. (hint: consider consumer and producer equilibrium)

4. Consider the demand for education.

a. Assume all citizens are entitled to a free government education. Explain how the government could or should determine the demand curve for education and the efficient amount of education to provide.

b. Assume education is privatized. How should the new education firms determine demand curve for education and the optimal provision of educational services?

c. Give a well reasoned explanation why either a free government educational system, or a private educational system is preferable.