University Economics Assignment: Public Finance and Welfare Analysis

This economics assignment covers a range of topics within public finance and welfare economics. It includes true/false questions assessing understanding of concepts like fairness in income distribution, externalities, adverse selection, and the effectiveness of different types of grants. Fill-in-the-blank questions delve into topics like welfare systems, market efficiency, deadweight loss, emissions taxes, and the effects of government transfers. The assignment also features grouped questions that provide scenarios for analyzing equalization payments, social welfare functions, altruistic behavior, and the market for cigarettes and post-secondary education. Furthermore, it explores risk aversion, housing subsidies, public goods, and the effects of pollution and factory emissions, requiring students to apply economic principles to solve problems and analyze various scenarios.

Part A: True/False Questions. Each question is worth one mark. On the answer sheet
write T for true and F for false.
1. The concepts of “fairness” and “equality in the distribution of income” are always
synonymous under the Utilitarian approach to income redistribution.- F
2. If the poor’s level of food consumption generates a positive externality, then a cash subsidy
to the poor would be a sensible way to correct for the externality - F
3. Adverse selection is a problem of hidden information - T
4. Municipal zoning laws can be used to control property tax bases in a political jurisdiction - F
5. A province is always better off with an unconditional grant than with a matching conditional
grant of equivalent value - F
6. A province can never be worse off with an unconditional grant than with a non-matching
conditional grant of equivalent value - F
7. An unconditional grant is always less effective than a matching conditional grant of
equivalent value - F
8. An unconditional grant is always less effective than a non-matching conditional grant of
equivalent value - F
Part B: True/False ‘Grouped’ Questions. Each question is worth one mark. On the
answer sheet write T for true and F for false.
Use the following information to answer the next three questions:
Consider the following formula for calculating equalization payments in province i:
Ei =[ ∑
j =1
5
tcj (bcj −bij )]N i
where j denotes revenue source and c denotes the national average.
9. t cj bij is the amount of per capita revenue that province i would generate if it levied the
national average tax rate on the national average per capita tax base - T
10. Province i is entitled to receive equalization payments if Ei is negative - T
11. If tcj (bcj −bij )<0 , then province i is said to have a per capita revenue deficit for revenue
source j - T
Part C: Fill-in-the-blank Questions. Each question is worth one mark. On the answer
sheet record the alphabetical answer/numerical answer/word(s) answer. For numerical

answers, round to two decimal places.
12. Peter can work for a wage of $10 per hour up to a maximum of 480 hours per month. He
faces a welfare system that pays a monthly benefit of $500. The benefit is reduced by 50%
for each dollar of earnings, but the first $200 of work earnings are exempt from the clawback
rate (in other words, the recipient receives $500 in benefits and gets to keep their first $200
of work earnings). Peter would have to work 120 hours for his income to be high enough
that his welfare benefit is reduced to zero.
13. The following figures illustrate conditions in the market for health care where there is some
sort of government involvement and consumption of health care is shown to generate
positive external benefits. Suppose for equity reasons government believes health care
should be offered free of charge.
Figure 3 illustrates the case where health care is neither equitable nor efficient.

14. The markets below show conditions in a perfectly competitive market in which there is some
sort of externality:
Only in Market ____B_______does the shaded area correctly identify the deadweight loss
that arises at the competitive equilibrium.

15. The town of Pollutionville has two smelting factories, Factory A and B. Each factory
produces air pollution. Factory A’s marginal abatement costs are given by MACA=20-0.5eA.
Factory B’s marginal abatement costs are given by MACB=40-eB. The Pollutionville City
Council wants to introduce a constant per unit emissions tax that will reduce total emissions
from the two factories by 18.75% cost-effectively. The total tax receipts the Council would
collect from such a tax would be $ ______325_________.
16. The following figures are optimal choice diagrams, illustrating the effects of federal
government transfers to the province of Ontario. In the figures, the horizontal axis measures
the quantity of Ontario government output of public goods, G, consumed by residents of the
province. The vertical axis measures the amount of private good consumption, C, consumed
by the province. Assume that units of G and C are defined so the price of one unit of each is
$1. Using community indifference curves, the province maximizes its utility subject to the
government budget constraint at point E1.
Suppose that a matching conditional grant from the federal government is used entirely for
tax relief. Figure _____3____ best represents this situation.

Part D: Fill-in-the-blank ‘Grouped’ Questions. Each question is worth one mark. On the
answer sheet record the alphabetical answer/numerical answer/word(s) answer. For
numerical answers, round to two decimal places.
Use the following information to answer the next two questions:
Suppose society consists of two individuals, A and B, who must split a fixed income of $100.
Individual A’s marginal utility of income is given by MUA=400-8IA and individual B’s marginal
utility of income is given by MUB=800-4IB.
17. If the social welfare function is given by W=UA+UB, then at the optimal distribution of
income, social welfare (W) is _____90,000__________.
18. Suppose instead that the social welfare function is given by W=UA, then at the optimal
distribution of income, social welfare (W) is ____10,000__________.
Use the following information to answer the next three questions:
Consider an altruistic individual whose utility function is given by U=f(Iself,Icharity). Their
marginal benefit of donating to charity (i.e. those in need) is given by MPB=200-Icharity and their
marginal cost of donating to charity is given by MPC=4Icharity. This individual’s donations also
result in marginal external benefits to third parties (those who benefit from knowing that
donations are being made to those in need), given by MEC=5. Using a graph with dollars on the
vertical axis and Icharity on the horizontal axis, answer the following questions.
19. This individual will voluntarilydonate $ ____40__________to charity.
20. The deadweight loss associated with this individual voluntarily donating to charity is
$____10_________.
21. To encourage this individual to voluntarily donate the socially efficient amount to charity
government would need to offer this individual a tax credit in the amount of
$_____5________.

Use the following information to answer the next eight questions:
Consider the market for cigarettes. The demand curve in the market is given by Q=100-P and
the supply curve is given by Q=P/3, where Q is the number of cigarettes. Cigarette smoking
creates a negative externality such that marginal external cost increases with the number of
cigarettes smoked according to the function MEC=Q. Now suppose government imposes an ad
valorem (%) Pigouviantaxon producers in this market.
22. The ad valorem tax rate is _____25______%.
23. Loss in consumer surplus (∆CS) is $ __112.50__________.
24. Loss in producer surplus (∆PS) is $ ___337.50__________.
25. Government tax receipts (∆GB) are $ ___400_____________.
26. Reduction in third party (external) effects (∆EE) is $ ___100___________.
27. The decrease in total benefits (∆TB) are $ ____450_________.
28. The decrease in total costs (∆TC) are $ ______125__________.
29. The gain in net social welfare (∆NSW) is $_____67.5___________.

Use the following information to answer the next eight questions:
Consider the market for post-secondary education. The demand curve in the market is given by
Q=100-P and the supply curve is given by Q=P/4, where Q is the number of students. Education
creates a positive externality such that marginal external benefit increases with the number of
students according to the function MEB=Q. Now suppose government provides an ad valorem
(%) Pigouviansubsidyto producers in this market.
30. The ad valorem subsidy rate is _____20______%.
31. Gain in consumer surplus (∆CS) is $ ___200_________.
32. Gain in producer surplus (∆PS) is $ ____790_________.
33. Increase in third part (external) effects (∆EE) is $ _____390_________.
34. Government subsidy payments (∆GB) total $ ____400____________.
35. The increase in total benefits (∆TB) are $ _____350____________.
36. The increase in total costs (∆TC) are $ ______375__________.
37. The gain in net social welfare (∆NSW) is $____100____________.
Use the following information to answer the next four questions:
Suppose Fred is a risk-averse decision maker with a utility function U= , where W denotes
Fred’s wealth. Fred’s current wealth is $10,000. However, there is a 68 percent chance that
Fred will have an accident that reduces his wealth to $2,500.
38. Fred’s expected loss from an accident is $___5100____________.
40. The maximum risk premium Fred is willing to pay is $____544_____________ .
39. The maximum amount Fred is willing to pay for insurance against this loss is
$_________5644________.
41. If the insurance company charges Fred a premium for insurance equal to the fair premium
plus $500 to cover the company’s loading costs, Fred will be (better or
worse )___better_______ off if he buys the insurance.

Use the following information to answer the next two questions:
The following optimal choice diagrams illustrate the effects of government assistance to help a
low-income individual purchase housing. The five figures show the quantity of housing on the
horizontal axis and expenditure on other goods on the vertical axis. They also show four of the
individual’s indifference curves. In the absence of government intervention, the individual’s
optimal consumption bundle is at E1.

42. Suppose the individual is eligible for a housing subsidy that pays a fraction of his rent on
housing, and as a result of the subsidy he chooses to increase his consumption of housing;
however, he would be better off with an equivalent lump-sum cash subsidy. The figure that
best represents this situation is Figure ___2_________.
43. Suppose the individual is eligible for a public housing program that pays a fraction of the
market rent on housing, but to take advantage of the subsidy he would have to move into
government-subsidized apartments offered in public housing complexes that come standard
with ‘J’ rooms. Suppose the individual chooses to accept the public housing apartment
despite having to move from a larger nonsubsidized apartment unit into the smaller
subsidized unit, but he would much prefer an equivalent lump-sum cash subsidy. The figure
that best represents this situation is Figure __3___.
Use the following information to answer the next four questions:
Consider two municipalities, A and B, in the same province. Residents in municipality A enjoy
attending outdoor music concerts (a public good) held in their public park. Each resident in
municipality A has a marginal benefit curve for these concerts given by MB=10-2Q, where Q is
the number of outdoor concerts. There are 100 residents in this municipality. Residents in
municipality B do not enjoy outdoor music concerts (they are more into sports activities). Each
resident in municipality B therefore receives no marginal benefit for these concerts. There are
400 residents in municipality B. Each municipality has the same constant marginal cost of
providing these concerts given by MC=125. Suppose outdoor music concerts are typically
financed by municipalities with distortionary taxation and that the marginal cost of public funds
is MCF=1.6 (assume with no tax exporting).
44. The efficient number of concerts in municipality A is _____0__________.

45. The efficient number of concerts in municipality B is ___0______.
46. Now suppose the two municipalities amalgamate. As a result assume that each of the two
municipalities is required to have the same number of concerts and that the number in each
municipality is the average of the number before amalgamation. The total loss in net social
welfare resulting from the requirement that the two municipalities provide the same number
of concerts is $ __165_________________.
47. Suppose that instead of financing their concerts with distortionary taxation each of the
municipalities (before their amalgamation) had the option of shifting all their tax burden (of
financing their concerts) to other jurisdictions through tax exporting. Under this scenario, the
number of concerts provided by municipality A (before its amalgamation) would have been
_______0_____.
Use the following information to answer the next four questions:
The town of Lumberville has a pulp and paper factory that produces air pollution. The marginal
damage to the community is given by MD=3e, where e is the level of emissions from the factory.
To reduce its emissions, the pulp and paper factory would face marginal abatement costs of
MAC=20-2e. Suppose the factory’s emission levels are currently unregulated. Using a graph
with dollars on the vertical axis and e on the horizontal axis, answer the following questions:
48. If the factory’s emission levels were reduced to the efficient level, the gain in net social
welfare to the town of Lumberville would be $ ___90_____________
49. Suppose the town of Lumberville were to enact a liability law that required the factory to pay
for any environmental damages it caused. The amount of damage payments the factory
would choose to pay under the liability law would be $ __126______________.
50. Suppose that instead of a liability law the town of Lumberville were to enact an emissions tax
that required the factory to pay a constant dollar amount of tax per unit of emissions. If the
town set the per unit tax to ensure an efficient level of emissions, the amount of money the
factory would choose to pay in taxes would be $ ________36__________.
51. Suppose that instead of a liability law or emissions tax the town of Lumberville decided to
subsidize pollution abatement by the factory.If the town decided on a constant dollar amount
of subsidy per unit of emission abatement, the dollar amount that would be needed to
encourage the factory to reduce its emissions to the efficient level would be $ ____6_______
per unit of emission abatement.