L1003 Economics of Public Policy

ANSWER ALL QUESTIONS IN PART 1 AND PART 2

PART 1 (40 marks)

Please show your steps and reasoning wherever possible. Marks will be deducted for answers with insufficient explanation/justification.

1. The market for cigarettes has the following supply and demand functions:

where and denote the prices (in pounds) received by sellers and price paid by buyers respectively, and and denote the quantities supplied and demanded respectively. Similarly, the market for potato crisps has the following supply and demand functions:

(a) The government is considering levying a per unit tax of £1 on cigarettes. Calculate how this tax will affect the quantity and price in the market for cigarettes. [5 marks]

(b) Suppose that the government were to instead levy a £1 per unit tax on potato crisps. How much revenue would this tax generate? [5 marks]

(c) Suppose the government wants to raise £1 in tax revenue, and wants to do so by levying a per-unit taxes on either cigarettes or crisps (but not both), in such a way that the excess burden of taxation is minimized. Given this objective, which of the two commodities should be taxed? Calculate and compare the excess burden associated with the tax on each of the two commodities to justify your answer. [10 marks]

2. A factory releases one unit of pollution for each unit of output produced. The marginal cost of production is given by MC=2+Q, where Q is the number of units of output produced. The demand function for the product is given by Q=20-P. The marginal external cost (damage) from pollution is given by MEC=0.5Q.

a. What will be the equilibrium price and quantity if the market is left unregulated? [5 marks]

b. What is the socially optimal level of output? [5 marks]

c. Compute the deadweight loss due to the externality. [5 marks]

d. Compute the Pigovian per-unit tax on output that would result in the socially efficient level of output. [5 marks]

PART 2 (40 marks)

Answer each of the three questions below. Do not exceed the word limit of 400 words for each answer.

1. Discuss whether, and if so how, harm reduction policies may affect drug trafficking, drug consumption, and crime. [12 marks]

2. Summarize the key findings of the work of Dobkin, Nicosia, and Weinberg (2014) regarding the impact of supply-side interventions on the market for methamphetamines. [12 marks]

3. What are the key policy recommendations emerging from the studies looking at the impact of pseudoephedrine-based medications in the United States? [16 marks]