Problem Set #6

Problem Set #10 &= nbsp; &nbs= p; &= nbsp; &nbs= p; &= nbsp; Name:______________

PPA 723 &nb= sp; = &nb= sp;

Professor John McPeak

1= ) Say there is a community owned plot of land.&n= bsp; There are five families who have houses in this community and can use the plot of land; the McPeaks, the Alphas, the Blooms, the Fraisers, and the Lealas. These familie= s have a meeting to decide what they want to put on the plot of land. They will vote for each item in tu= rn. Assume that the representative of = each family at the meeting is able to define the household willingness to pay, e= ach household has one vote, and each household pays an equal share of a project= if it passes.

	McPeaks	Alphas	Blooms	Fraisers	Lealas	Total Cost
Sandbox	$420	$350	$300	$150	$190	$1000
Petting zoo	$250	$510	$150	$290	$420	$1500
Gazebo	$440	$ 50	$410	$450	$ 30	$2000

a) How should each household represen= tative vote, and which of the following items will pass= a referendum?

	McPeaks	Alphas	Blooms	Fraisers	Lealas	Pass or not
Sandbox
Petting zoo
Gazebo

= b) Have we selected the project that maximizes total benefits? Why or why not?

2) Studies have shown that placing trained nutrition monitors in local clin= ics leads to lower child malnutrition rates in your country. Studies also show that improved sc= hool feeding programs leads to lower child malnutrition in your country. Two proposals are on your desk, ea= ch designed to reduce the child malnutrition rate in your country by 1% per year. You only have enough operating funds to do one, and you can’t combine them – it is p= ick one or the other.

Placement of nutrition moni= tors: This is a three year program (star= t up recruitment and hiring is year zero, year one the monitors are in place working, year t= wo the monitors are in place working, then the project phase ends) to hire and= place in local clinics the nutrition monitors.&n= bsp; It will cost 2.3 million in the current start up year to hire and pl= ace these monitors, and will cost 1 million per year for each of two years of program implementation to pay the salaries of these local nutrition monitor= s.

School feeding: This is also a three year program = (start up and organization in year one, then feeding in the following two years, t= hen the project phase ends) to provide food to children in primary schools. The first year costs 1.6 million, and the operating costs per year are 1.4 mill= ion for the following two years. =

a. Which program achieves = the targeted reduction of the child malnutrition rate at the lowest present val= ue cost if the discount rate is 10%?

b. Which program achieves = the targeted reduction of the child malnutrition rate at the lowest present val= ue cost if the discount rate is 5%?

c. = Contrast your answer to (a) and (b) by describing how future expenses are impacted b= y a relatively lower discount rate, and the pattern of cost flows for the two policies.

3) Highland agriculture in Ethiopia is facing problems d= ue to soil erosion. You are conside= ring two different programs that will address the soil erosion problem over a fo= ur year time horizon (t=3D0, t=3D1, t=3D2, t=3D3). The present value of benefits due to reduced soil erosion resulti= ng from either program is estimat= ed to be 5 million dollars. The discount rate is given as 10%.

Program One: Agrofore= stry. This tree planting project will co= st 3 million dollars in the current year (t=3D0). The trees will provide a benefit in addition to combating soil erosi= on in the form of marketable seeds. This benefit is estimated to be 0.5 million dollars in the first year after they are planted (t=3D1), 1 million dollars in the second year after = they are planted (t=3D2), and 0.5 million dollars in the third year after they a= re planted (t=3D3). After this t= ime the trees will no longer produce seeds, thus this benefit will come to an end.<= /p>

Program Two: Bund construction. Bunds are a= n anti soil erosion measure that involves building dirt and stone rows across stee= ply sloped land to reduce soil erosion. Bund construction will take two years, the current year (t=3D0) and = next year (year 1). It will cost 1 million dollars each year to construct these bunds.

a. Which p= rogram is superior in NPV terms?

= ;

b. Does your answer change if the ben= efits of the marketable seeds is lower than predicted in the original scenario, a= nd is instead 0.25 million when t=3D1, 0.5 million when t=3D2, and 0.25 millio= n when t=3D3?

&nbs= p;

4) Illus= trate how deriving the demand curve for a public good differs from deriving the demand curve for a private good. Describe how this difference reflects the difference between the definition of a public good and a private good.

5= ) Public goods.

= a. = There are three people who live in a town. We are considering the demand for the number of fire engines, where = q is the number of fire engines protecting all three. Elmo’s demand is defin= ed by 90-2*q. Grover’s is def= ined by 60-3*q. Zoe’s is defined by 150-5*q. At q= =3D17, what is total willingness to pay on the societal demand curve for fire engi= nes?

= b. If the marginal cost of a fire engine is constant at 130 and no effort is made= to avoid the free rider problem, what number of fire engines will be provided?=