epp_assignment01

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Feb 20, 2024

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1 Economics of Public Policy Week 1 Assignment To receive credit, you must submit this assignment by the due date. Late assignments will not be accepted. 1. Since 2010, substantial population growth in Metropolia has increased the demand for rental housing. As a result, rents have increased and the mayor is considering implementing a price ceiling that keeps rents at their 2010 levels. The following graphs both show the supply and demand for rental housing in Metropolia in 2022. A. Price ceiling B. Remove conversion restrictions 1.1. On the left graph, illustrate the effect of the mayor’s price ceiling on the market. Use the graph to explain what will happen to the quantity of rental units consumed. 1.2. An analyst for the mayor suggests an alternative to the price ceiling: increase the supply of rental housing by removing restrictions on converting warehouses into residential homes. Suppose that this alternate policy is also effective at keeping rents at their 2010 levels. On the right graph, illustrate the effect of this alternate policy on the market outcome. Use the graph to explain what will happen to the quantity of rental units consumed, and contrast this to the outcome under the price ceiling. D (2022) D (2022) Quantity Price S (2022) Price Quantity S (2022)

2 2. The mayor is considering a new tax on movie theatres of $3 per movie ticket sold. Below is the annual demand and supply schedule for movies. 2.1. Show the effect of this tax on the graph. How will the amount of movie-going change, and what will the price of movies be after the tax? 2.2. What fraction of this tax is borne by movie theatre owners? Explain your reasoning. 2.3. Movie theatre owners are against this policy and have considered fighting it legally. Assuming that a legal battle could successfully stop this tax for the next year, how much should movie theatre owners collectively be willing to spend on a legal fight? Explain your reasoning. 2.4. Movie theatre owners are considering an alternative strategy: lobbying the mayor to have the tax levied on consumers rather than their theatres. How much should they be willing to pay for this alternative strategy? Explain your reasoning. 2.5. An analyst in the mayor’s office has suggested that rather than taxing movie tickets, the city taxes the popcorn purchased at movie theatres, at a rate that would raise the same tax revenue as the movie ticket tax. From an economic efficiency perspective, which tax would you recommend, and why? N.Y. City Movie Market 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 Millions of movie tickets Price

3 3. The market for road bicycles in the U.S. has been expanding in the last two decades. Economists describe it as a perfectly competitive market since there are many producers and consumers. The following graph shows annual U.S. demand and supply for road bicycles (expressed in thousands). 3.1. The world price of road bicycles price is $300. What will be the equilibrium market outcome in the U.S. under free trade? Will there be any exports/imports, and if so, how many? 3.2. U.S. producers believe that they are losing market share to European producers. The Association of U.S. Bicycle Manufacturers calls for the U.S. government to impose a $200 tariff per bike. How would such a tariff affect the equilibrium outcome compared to free trade? Explain, using your graph. 3.3. In response to criticism that the tariff would harm consumers, a member of the Congressional delegation from the state of Washington proposes using tariff revenues to fund the construction of bike lanes around the country. Assuming the tariff revenues were used effectively for this purpose (i.e., all the bike lanes were built and bicycle consumers used them), would bicycle consumers be better off with the tariff plus bike lanes, or with no tariff and free trade? Explain your reasoning. $0 $100 $200 $300 $400 $500 $600 $700 $800 $900 $1,000 $1,100 $1,200 0 100 200 300 400 500 600 700 800 900 1000 1100 1200 Bicycles, 000s

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