Shameless boasting

UCLA has a minor in Public Affairs. (Despite the excellent examples of Princeton and Duke, where undergraduate public policy programs attract superb students, there’s no sentiment save mine for making it a major.)

I have the privilege of teaching one version of the intro. It’s technically a lower-division course, though in practice most of the students are juniors and seniors: lots of political science majors, but with a scatter from all over the campus. There is no prerequisite, not even introductory economics or statistics.

My version of the course is pretty demanding conceptually; we use Stokey & Zeckhauser’s Primer for Policy Analysis as the main text, though I don’t ask the students to understand most of the math.

This year, I decided to hit them with a really stiff final.

Below is the exam. Even though it was graded on a completely inflexible standard (I do my curving after all the scores are in, rather than as I go along) the students averaged 75%.

So if you read letter of recommendation from me that says some undergraduate student of mine walks on water, I really think you should believe me.

Part I

1. Define “authorizing environment.”

2.

a. What is the link between budgeting, diminishing marginal utility of income, and the utility of risk spreading?

b. What does the value of risk spreading imply about redistribution of income?

c. How does moral hazard complicate the policy choice about how much income the government ought to redistribute?

3. The term “democracy” is often used to describe our preferred way of organizing social and political life. One definition of “democracy” is that the will of the majority should always prevail.

a. What is the tension between “democracy,” so defined, and “policy analysis” as a discipline of thought?

b. How do the ideas of “faction” and “rent-seeking” challenge the belief that “democracy” in that sense would be a good thing?

4. Why are Standard Operating Procedures necessary? How do they constitute a problem?

5. What is incentive management? How does it relate to the theory of principal-agent relationships? What characteristic problem does it encounter?

6. What other than a market failure could justify public intervention? Why might public intervention not be justified even in the presence of a market (or other) failure? How does drug policy illustrate both the justifications for public action and the reasons to be wary of it?

7. What do grazing and fishing have in common with freeway travel? What is the general solution to the resulting problem?

8.

a. What makes a pharmaceutical or a music CD an example of a partial public good?

b. How can grants of property right (patents or copyrights) allow production such good?

c. Explain why the resulting situation is, or is not, optimal.

d. Give an example of a pure public good and explain why it couldn’t be produced in the same way.

8. How does social capital facilitate the provision of public goods? In what sense is social capital itself a public good?

9.

a. Why isn’t the Pareto criterion an adequate guide to making public choices?

b. How does the potential Pareto criterion get around that problem?

c. How does benefit-cost analysis relate to the potential Pareto criterion?

d. How does it relate to Franklin’s “moral or prudential algebra”?

e. What role does the idea of “willingness to pay” play in benefit-cost analysis?

Part II

1. You are confronted with a choice: you can have $50 for certain, or take a chance between getting $150 (with some probability X) or getting nothing.

a. Assume you are risk-neutral. What is the critical value of X? Why?

b. How would your answer change if instead you were risk-averse?

Now, you are confronted with another choice: you have a 10% chance of winning $100 or you can have Y dollars for certain.

c. Assume you are risk-neutral. What is the critical value of Y? Why?

d. If you are indifferent between a 10% chance of winning $100 and $8 for certain, what does that say about your risk preference?

e. Identify the Certain Money Equivalent (CME) in the problem above.

2. You need to decide how much to spend on three different projects.

For project A, benefits equal twice costs, no matter how much you spend on project A.

For project B, benefits equal half of costs, no matter how much you spend on Project B.

For project C, the following table describes the relationship of benefit to cost:

Budget Benefits

$0           $0

$1000     $4000

$2000     $8000

$3000    $12,000

$4000     $16,000

$5000     $17,500

$6000     $18,750

$7000     $19,500

$8000     $20,000

$9000     $20,250

$10,000   $20,300

a. Consider each project independent of the others. What is the optimal amount to spend on project A? Project B? Project C?

b. Now consider all three projects together, and assume that you have no more than $10,000 to spend among them, but you can distribute that amount (or any smaller amount) across the three projects in any way you like.

How should you distribute your $10,000 among the 3 projects?

What is the shadow price on the budget constraint?