Exam 3
Each question below is valued at 25 points. As always, this is a take-home exam and thus the expectations for depth in the answers are high. Due date: April 7, 2015.
1. Read this document http://www.whitehouse.gov/omb/circulars_a094 and then explain cost benefit analysis as required by the U.S. federal government.
2. Next read this document http://blogs.reuters.com/great-debate/2012/01/03/the-trojan-horse-of-cost-benefit-analysis/ and comment.
3. Farmer Brown keeps a storybook farm raising various row crops along with cows, sheep, horses, a dog, and many feral cats. The cats primary purpose on the farm are to keep the rodent population in check. When not fed, the cats vigorously hunt rodents and keep the rodent population within acceptable ranges. Farmer Brown has noticed an interesting phenomena, however, when he feeds the cats. Specifically, he has noticed that when he purchases food for the cats, their mousing behavior diminishes. The cats seem to simply lay around the farm basking in the sun, gaining weight, and stop catching their own food. In addition to the sloth that he notices in the cats, he also notices that the cat population begins increase due to the increased food supply. He periodically attempts to stop feeding the cats but, when he does, the cats get down right nasty. They collect around his feet, meow a lot begging for food, and sometimes take swipes at him as he passes by in their plea to be fed. As the population increases he also experiences an increase in medical bills, such as vaccinations, to help prevent disease from entering the farm and affecting his entire farm operation. He is thus faced with a conundrum. He realizes that his generosity in feeding the cats has induced sloth into the population. As a profit maximizer, farmer Brown is interested in keeping his costs down. Feeding and vaccinating the cats is eating into his profits and the increasing rodent population is decreasing his revenue stream because they are eating part of the grain that would otherwise be sold or fed to livestock. Ultimately, farmer Brown must make a decision. If he stops feeding and and providing health care to the cats he will be faced with cat riots. Some cats will die from starvation and disease. Others will simply leave and move to other farms at which they are fed. Those that remain will return to hunting mice with a much smaller, but sustainable, population. Farmer Brown must decide whether to stop feeding the cats and go through the transition period to increase his profits or decide that his existing profit level is sufficient.
Write an answer which a) advises Farmer Brown on his course of action and b) compares this situation to that of welfare spending in the U.S. In what ways are the two situations similar and in what ways do they differ. What is the appropriate U.S. policy response to current levels of welfare spending and how does changing the status quo change the incentive structures for individuals currently enrolled in various assistance programs? Should the programs be kept at current levels, increased, or decreased? Explain.
4. Medicare and Social Security are two 'safety net' programs designed to prevent the elderly from falling into extreme poverty as occurred during the great depression. Those same two programs will be responsible for continuing major federal budget deficits in the future if the status quo remains unchanged.
a. Detail the history of these two programs from their inception to the present.
b. What are the requirements for participation and what demographic issues exist that make the program unstable?
c. Develop policy solutions that will resolve the problems inherent in the system. Explain your policies in detail and explain the political difficulties associated with implementing your proposed policy changes.