1. Be complete, but concise.
2. Explain your answers. Make your assumptions explicit. You may add additional pages if necessary.
3. Use graphs where appropriate. Please type your exam.
4. Total time for the exam is 180 minutes. Each question is weighted equally, and should take between 30 and 40 minutes. The parts are just for your guidance, and will not be graded separately.
Answer all questions.
1. You have been asked to evaluate a new policy, to be called a directed negative sales tax (DNST). The DNST proposal is to have “essential foods,” like bread, eggs, and milk, be subsidized to aid the poor without the administrative problems of means testing recipients. Any goods where the poor are disproportionate consumers would qualify for the subsidy. The subsidy would be in the form of a payment to producers per unit sold. The objective of this policy is to replace the current Supplemental Nutrition Assistance Program (SNAP). Evaluate the DNST proposal, considering both the efficiency and equity impacts, and compare these impacts to SNAP. Discuss whether the social objectives of the program will be better achieved.
a. Among other things, consider whether the DNST policy will be successful in reaching its stated objectives of stimulating food consumption by the poor with reduced costs compared to SNAP (HINT: As a first step, first show the extent to which SNAP payments stimulate food consumption. Then show the DNST stimulus).
b. When comparing the efficiency and equity impacts of the DNST to SNAP, you may want to illustrate your answer for both a representative individual as well as for the market as a whole. You may also want to discuss the administrative trade-offs in the two policies.
c. You may also want to consider potential recipients in different circumstances. How would large families compare to smaller ones? How would payments differ based on consumption bundles? Would these differences be valued by donors (taxpayers)?
d. Conclude your evaluation of the DNST proposal with a recommendation as to whether or not it should be adopted as a replacement for SNAP. Justify your recommendation.
2. The Covid-19 event is showing the importance of good data. In particular, Harris County was reporting the number of cases per day based on the date they received the forms from medical providers, many of which were up to a month after the test, and which did not even account for when symptoms first showed in the patient (so the number of cases are based on dates when forms were received). Information is a pure public good, but which is costly to produce. So explain to the County Judge Lena Hildago why the data quality is poor. When you do so, think about the incentives to the providers of health care, and the incentives of patients. Explain the role of demand and supply elasticities. Who is currently paying the costs of data collection? Then evaluate a proposal to have the County pay providers for data that might actually be useful for making policy decisions (like when to re-open the economy). That is, if people were incentivized to report in a timely fashion, and if someone was paid to look at the reports and figure out the time window of when a patient first contracted the disease. Would the tax cost of the extra expense be worth it for taxpayers?
3. Texas currently has a system of state aid to school districts where state aid varies inversely per student with the property wealth per person of the school district. That is, school districts in areas with lower property values receive more state money per student than do districts with higher property values. Now the state government is considering doing the same thing for cities and towns for all publicly provided goods. The proposal has two parts:
a. Eliminate the (Texas) constitutional ban on a state-wide property tax. That is, the state will levy a property tax at a constant rate throughout the state, and local property taxes will be eliminated.
b. Then the state will distribute the entire proceeds of the property tax back to the cities, towns, and county governments. The amounts will be adjusted, however, so that governments with higher property value per resident will receive less money per capita than governments with lower average property value per resident.
The objective of the proposal is to make the distribution of public services (such as fire and police protection, trash pick-up, roads, and local courts and jails), more equal across the state. Evaluate this proposal on three levels, and then consider an alternative policy:
a. Consider the incentives of the local governments to provide services efficiently, and at the efficient level per resident.
b. Evaluate the proposal as to the effects on property values. What will be the incidence of the state-wide property tax?
c. Evaluate the impact on voters. That is, will they have good information to elect leaders that provide their preferred level of publicly provided goods, or not?
d. Would it be better to eliminate the property tax, and instead impose a progressive income tax that is used solely to fund the local governments. The local governments would then get equal allocations per capita (this is essentially the system used in Norway).