Description
As you know, “applied economics” is a different approach to understanding how
economics can be used in support of public administration and public policy. Unlike past
quizzes, the questions are different and more applied.
Instructions: there are four scenarios that you need to analyze using the material from
week 12, week 13, and parts of week 14. You will need to draw on the other models to
help formulate a response to these scenarios. Our goal is to evaluate you on your
critical thinking, apply and alter models to solve policy problems, and communicate
clearly with a principal. Please make sure that each of your answers includes a
recommendation. Like previous essay questions, please limit your responses to 500
words.
this is your ability to demonstrate critical thinking, economic concepts, and ability to
analyze complex information and communicated in a simplified, straightforward manner.
Question #1:
Scenario: Risk Trees and Loss Aversion
The city of Solvang in California is considering two new policies to curb the future spread of COVID-19.
One policy would implement rigorous vaccine requirements for all citizens and implement strict
lockdown procedures if a new variant emerges (“highly regulated”). The second policy would not have
required lockdown procedures and would have a less regulated vaccine policy (“less regulated”). Under
there current COVID-19 management plan, the city spends $400 thousands per in COVID-19 related
expenses.
Under the highly regulated plan, the city will have to spend $245 thousand enforcing their plan,
regardless of what occurs. Under this plan, the city believes there is a 25% chance in the next year that a
new, more contagious variant of COVID-19 will emerge. If this new virus emerges, they will implement
lockdown procedures. They believe that these lockdown procedures will be highly effective 60% of the
time, requiring only an additional $10 thousand in expenses. They also believe that this lockdown plan
will only be mildly effective 30% of the time, costing and additional $40 thousand in expenses. The
remaining lockdown time they believe will be ineffective, resulting in an additional $640 thousand in
expenses. If no new variant emerges, the city believes they will only need to spend an additional $100
thousand.
Under the less regulated plan, the city with have to spend $20 enforcing their loose vaccination policy,
regardless of what occurs. However, the city still believes there is a 25% chance that in the next year a
new, more contagious variant of COVID-19 will emerge. If this new variant emerges, they will need to
spend an additional $900 thousand in COVID-19 related expenses. If the new variant does not emerge,
they will only need to spend an additional $100.
Guiding Questions:
What are the expected outcomes of each of these policies given the risk? Are either of these plans better
than the status quo COVID-19 strategy? What would you recommend Solvang do being a risk neutral
individual? If you were extremely risk averse, would that influence the strategy you took, why?
Question #2:
Scenario: Allocating Public Goods
A farmer’s CO-OP is considering purchasing a new water extraction facility to increase the supply of
water available to their members. Due to their contractional obligations to the CO-OP, if the new facility
were to be built, each farmer would be required to chip into the cost and no farm could be left out. The
total cost of building this new facility is $400 thousand dollars. The CO-OP has proposed each farm pay
$80 thousand dollars towards this new facility. The following table reports each member farms
willingness to pay for a new water extraction facility:
Guiding Questions:
Is it socially efficient to build the water extraction facility, why? Above what price would it be inefficient
to start the program (or, conversely, below what price would it be efficient to start the program)? How
would the farms feel about the proposed per-farm cost? Would implementing the CO-OP’s payment plan
be Kaldor-Hicks efficient? Pareto efficient? If not Pareto efficient, how else might you design a payment
system for this program?
Question #3
Scenario: Externalities and Cap-and-Trade
In 2006 California passed historic climate change legislation, enacting a cap-and-trade program for
green-house gasses covering most relevant industries that operate in California. Currently, emissions in
California are “capped” at the level of historical (1990) emissions levels. Every year the California Air
Resources Board (CARB) auctions permits – i.e., carbon-credits – to polluting firms that allow them to
emit green-house gasses equal to the yearly permits they own. Firms are free to buy and sell these
permits among themselves in an open and perfectly competitive market.
Industrial interest groups have sued the state to abolish AB 32, claiming that it constitutes a new tax that
did not pass all necessary legislative requirements and is thus illegal under the California constitution.
Proponents of AB 32 claim that it is not a tax, as carbon-credits are simply property rights – owned by
the state on behalf of its residents – that can be freely bought and sold.
Guiding Questions:
What type of economic market failure is the cap-and-trade program attempting to correct? What does
this market failure mean relative to social and private cost and benefits? What economic
framework/theorem is the cap-and-trade program based on? How does this framework/theorem correct
the market failure? Do you agree or disagree that the cap-and-trade program constitutes a tax, why or
why not? If the program is not a tax, could you still accomplish the same economic outcome by using a
tax in its place?
Question #4:
Scenario: Asymmetric Information and Health Insurance
Arguably, one of the most important aspects of the 2010 Affordable Cares Act (ACA or
colloquially Obama Care) was the Individual Mandate. The Individual Mandate required
that most people, with certain exceptions, were required to hold health insurance. Those
that refused to hold insurance were charged a yearly penalty. The intent was to
broaden the “risk pool” – group of individuals whose medical cost are combined to
determine premiums – for insurance companies in an attempt to lower premiums for
high-risk individuals.
Detractors of the individual mandate argue that it is essentially a “tax” on the poor that
are unable to afford health insurance and must incur the penalty. They also argue that
the mandate requires healthy individuals to bare the cost of high-risk individuals as
premiums are spread across the risk pool.
Proponents of the individual mandate argue that subsidies provided to low-income
individuals offset any additional cost they might incur while also providing them with
health coverage. They also argue that the mandate prevents people from waiting until
they are sick to seek out health insurance, which would increase the risk in the market
and thus increase premiums for everyone.
Guiding Questions:
What type of economic market failure was the individual mandate attempting to correct?
How does this market failure influence the health insurance market? Do you think the
individual mandate corrects the underlying cause of this market failure, why or why not?
Do you think the individual mandate provides an equitable distribution of health
insurance, explain? Do you agree with the detractors or the proponents of the individual
mandate, why? Remember, answer these based on economic, not political or
emotional, reasoning.
Use APA citations if necessary for the questions.
Here are some important things to note: