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Spring 2016
Public Economics
ECON 4821
PUBLIC ECONOMICS
ECON 4821 - Spring 2016
Department of Economics
University of Minnesota
ProblemSet6
Due Date: Tuesday May 3rd, in the beginning
class.
Homework must be typed and a hard copy should be handed in. There will be a
20% penalty if you do not type it.
This homework consists of two problems. The first Social Insurance Programs and the second
concerns taxes and their associated deadweight loss.
1. This problem concerns some of the material covered in lecture 24. More information on
this topic may be found in Chapter 14 of the Gruber text, from which some of the following
questions are drawn. (50 points)
(a) (10 points) What is the ’Monday effect’ and why is it relevant for the estimation of
moral hazard in workers’ compensation?
(b) (15 points) What is an experience-rated system? What is the justification for an
experience-rated system?
(c) (15 points) Why does a
partial
experience rating effectively subsidize high-layoff firms?
University of Minnesota
1
Problem Set 6
Â
Spring 2016
Public Economics
ECON 4821
(d) (10 points) Several studies listed on page 416-420 of the Gruber text claim to estab-
lish that the number of people applying for disability insurance increases when the
admission criteria become more lenient. Why is this evidence of moral hazard?
2. Suppose that demand
D
W
and supply
S
W
in the market for widgets are given by
D
W
(
p
) := 12
−
2
p
S
W
(
p
) := 2
p
and that demand
D
S
and supply
S
S
in the market for shmidgets are given by
D
S
(
p
) := 8
−
p
S
S
(
p
) :=
p.
Suppose that the government needs to raise $6 of revenue from taxes on either widgets or
shmidgets or both. Answer the following questions.
(a) What is the lowest tax
Ï„
W
one would have to impose on widgets to raise $6 of revenue
in that market? What is the associated deadweight loss?
(b) What is the lowest tax
Ï„
S
one would have to impose on shmidgets to raise $6 of
revenue in that market? What is the associated deadweight loss?
(c) Suppose a friend suggests that because demand for shmidgets is relatively inelastic
compared with widgets, the government can minimize the deadweight loss by imposing
no taxes on widgets and a tax of
Ï„
S
on shmidgets. Is this good advice?
University of Minnesota
2
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Problem Set 6
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Answers
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Posted 05 Sep 2017 12:09 PM
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