Public Policy Analysis: Midterm Exam
(Toma)
Saratoga County is considering opening a large public fitness and recreation center, open twenty hours per day and free to all citizens. The center would provide a large swimming pool and several indoor jogging tracks, as well as weight machines and other equipment. It would also conduct aerobic exercise classes. Virtually all of the clientele is expected to be more than 21 years old, with a large group over 50.
1. (9 points) What are at least nine outcomes of this program that the county should consider?
2. (12 points) In what ways can the county gather information on how much of each of these outcomes will be produced by program? Discuss in detail.
Are some of these ways more accurate or more practical? Discuss why, using examples from this program.
NOTE: For questions 2 and 3, it is usually easier to build the answers around each technique (and then tie the outcomes to the techniques) rather than building the answer by proceeding outcome by outcome. However, any way of organizing the answer is equally correct.
3. (19 points) Discuss and illustrate all the approaches that Saratoga County could use to express these specific outcomes in monetary terms. Include a discussion of the strengths and weaknesses of each tool you use. (Be sure to keep the focus on this program.)
4. (10 points) Because some of the benefits of this program occur in different years, they have to be discounted. How do we decide the correct discount rate to use – whether it should be 6%, or 9% or whatever– and why is it so often difficult to determine? Discuss, using this program as an example.
(In your discussion, assume that the discount rate chooser is a neutral umpire who is neither for nor against this program. In other words, ignore political considerations.)
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5. (9 points) A city is considering building a crafts center. After expressing outcomes in monetary terms, the city determines that the initial cost of the crafts center will be $800,000. Annual operating costs (incurred at the end of years 1, 2, 3) will be $300,000 each year. Annual benefits will be $600,000 at the end of years 1, 2 and 3. All costs and benefits will end after year 3.
At a discount rate of 8% what is the value of this center? In one sentence: Should it be built, and why?
6. (10 points) What do we mean when we refer to potential pareto efficiency? How does this concept relate to pareto efficiency? Most important: How does this concept relate to cost benefit analysis? Be sure to define all terms you use in your explanation, and illustrate your discussion with an example.
7. (6 points) Briefly discuss some strengths and weaknesses of federal use of cost-benefit analysis, drawing specific points and examples from the article by Hahn and Tetlock, (“Has Economic Analysis Improved Regulatory Decisions?”).
8. (9 points) A city is considering two projects. Their pattern of benefits is shown in the tables below. (As in the homework and usually in real life earlier stages must be completed before later stages are implemented.)
For both X and Z, give total cost, total benefit, marginal cost, marginal benefit, net marginal benefit and net total benefit for each stage.
(Note that X is in terms of marginals, and Z is in terms of totals.)
Project X
Marginal Costs Marginal Benefits
stage 1 $3,000 $6,000
stage 2 $5,000 $9,000
stage 3 $4,000 $6,000
Project Z
Total Costs Total Benefits
stage 1 $4,000 $6,000
stage 2 $8,000 $14,000
stage 3 $12,000 $21,000
9. (8 points) Based on the table above, which stages of X and Z should be chosen if $12,000 is available; if $20,000 is available?
10. (4 points) Five years ago, the county bought a computer system for $5 million. However, it has failed to work, and has accordingly returned no benefits. To get it up and working will require $5 million more, bringing total cost to $10 million. If it worked, the computer system would return total benefits of $6 million. Should the county spend the additional money? Most importantly: in a sentence or two, indicate why.
11. (4 points) Only one of these four projects can be chosen. Which should it be? Importantly: in a sentence or two, indicate why.
Costs Benefits
Project A $600,000 $635,000
Project B $1,200,000 $1,241,000
Project C $ 10,000 $ 50,000
Project D $50,000 $120,000
