University of Chicago Professor Damon JonesPublic Finance and Public Policy Winter Quarter

Problem Set 2Due Date:

Friday, February 4th, 5:00 pm

1. Short Answers:

(a) Suggest one way in which generational imbalances might be understated, and one way in whichthey might be overstated.

(b) Is it neccessarily inequitable for future generations to face higher taxes as a result of benefits thataccrue to those living today?

(c) How does the opportunity cost of a government purchase vary depending on whether the marketfor the purchased good is perfectly competitive or monopolistic?

2. [Gruber, Ch. 8, Q. 14] Jellystone National Park is located 10 minutes away from city A and 20 minutesaway from city B. Cities A and B have 200,000 inhabitants each, and residents in both cities have thesame income and preferences for national parks. Assume that the cost for an individual to go to anational park is represented by the cost of the time it takes her to get into the park. Also assume thatthe cost of time for individuals in cities A and B is $.50 per minute. You observe that each inhabitantof city A goes to Jellystone ten times a year while each inhabitant of city B goes only five times a year.Assume the following: the only people who go to the park are the residents of cities A and B; the costof running Jellystone is $1,500,000 a year; and the social discount rate is 10%. Also assume that thepark lasts forever.

(a) Compute the cost per visit to Jellystone for an inhabitant of each city.

(b) Assuming that those two observations (cost per visit and number of visits per in- habitant of cityA, and cost per visit and number of visits per inhabitant of city B) correspond to two points ofthe same linear individual demand curve for visits to Jellystone, derive that demand curve. Whatis the consumer surplus for inhabitants of each city? What is the total consumer surplus?

(c) There is a timber developer who wants to buy Jellystone to run her business. She is offering $100million for the park. Should the park be sold?

3. Read the resarch paper by DellaVigna, List and Malmendier (2010), Testing for Altruism and SocialPressure in Charitable Giving. You can find a copy here:

http://emlab.berkeley.edu/ulrike/Papers/charsocpress10-06-17.pdf.

You may not understand the models and structural estimation methods, but you should at least readthe introduction of the paper closely and look at the figures. Your answers should not exceed one page.

(a) Of the various empirical methods that we have discussed in lecture, how would you characterizethe empirical methods of this research project?

(b) What explanations for contributing to a public good are tested in this research project?

(c) Summarize the empirical results. That is, explain what happened in the data, without necessarilyinterpreting the results.

(d) What implications do the empirical results have?

(e) How could you extend this experiment to test the theory of reciprocity in charitable giving?

4. What is the intuition behind the notion of Ricardian equivalence? How might you look for empiricalevidence to test the presence of this phenomenon?

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