Public Economics: Week 2

Definitions to know:

 Accounting and Economic Costs

 Revealed preference and contingent valuation
 Discount rate
 Type I vs Type II errors
 Randomized trials
 Quasi-Experiments
 Haig-Simons definition of consumption
 Absolute and relative poverty
 Gini coefficient

Short answer questions:

If public works entail human safety concerns, they must often incorporate a means of valuing
human lives. What have been some proposed methods for valuing human lives, and what are the
disadvantages/benefits to each method?

Forgone wages over life-time

Does not value leisure
Contingent Evaluation
Willingness to pay

Let’s suppose that the government is interested in introducing a federally financed mortgage
program for poorer households wishing to purchase their first house. Disregarding other aspects
related to the policy, how may subsidized interest rates on federal mortgages be problematic
(make sure to incorporate a discussion about the discount rate and the term of the asset in your
answer)?

Randomized trials are the most ideal method of analyzing how a policy influences outcomes,
especially if the sample is sufficiently large and lacks selection bias. Despite this, it is
infrequently used in most empirical analysis of public policy. Why is this the case?

Evaluate this statement: “Income is easy to measure – one simply calculates the salaried earnings
an individual makes in a year”.

How does the US measure poverty, and what are problems associated with this measurement? In
light of these problems, what are some possible alternatives to measuring poverty in the United
States?
What are two common measurements of inequality? What are the problems associated with
these measurements in terms of their capacity to gauge inequality within a country?