Describe the dimensions along which moral hazard can exist

These questions are based of Jonathan Gruber’s Public Finance and Public Policy, 3rdedition (2010).

The assignment has 6 points.

1.The demand relationship for the good is P = 50 – 2Q. The supply relationship for the good is P = 5 + Q. Who bears the economic incidence of this tax if there is a $2 per unit tax on the buyer of this good? Who bears the statutory incidence? Who bears the statutory and economic incidence if there is a $2 per unit tax on the seller of this good? Calculate the deadweight loss from this $2 per unit tax and how much tax revenue the government will receive from the tax.(2 points)

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2.The City of Los Angeles is considering a railroad track improvement project that is expected to provide benefits in the form of time savings associated with more speedy transport of people through the region.In addition, the project is expected to include many railroad grade crossing improvements that are expected to save lives.The cost of materials for the project is expected to be $150 million.The average cost of labor for construction of the road is $20 per hour for 1,000,000 hours of total labor.The city will need to maintain the railroad which will cost it $2 million per year.The railroad track project is expected to save 16 lives per year.On average, people are expected to accumulate $2 million in earnings over their life span.By improving the railroad track system, it is expected to save 15 minutes on average per trip.It is expected that there will be 1,000,000 trips on the roads affected by the project per year with an average hourly wage rate per driver of $25.Assuming a discount rate of 5{0e601fc7fe3603dc36f9ca2f49ef4cd268b5950ef1bbcf1f795cc00e94cdd119}, perform a cost benefit analysis on this proposed project over a 5 year period providing a recommendation and numerical justification for your recommendation. (3 points)

Gruber problems (note – these are problems from the Third Edition of the text)

3.Chapter 12, Problem 4(.5 point)

Small companies typically find it more expensive, on a per employee basis, to buy health insurance for their workers, as compared withlarger companies. Similarly, it is usually less expensive to health insurance through an employer–providedplan than purchasing it directly from an insurance company even if your employer requires you topay the entire premium. Use the ideas from this chapter to explain these observations.

4.Chapter 12, Problem 10 (.5 point)

Describe the dimensions along which moral hazard can exist. Can you think ofways in which thegovernment can reduce the prevalence of moral hazard along each dimension?

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