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FALL 2022: ECON 323 FINAL EXAM

DATE: Thursday, December 08, 2022

TIME AVAILABLE IN CANVAS: 8:00 AM EST to 4:30 PM EST.
(Note: We will NOT have class of Thursday, December 08, 2022)

TIME LIMIT TO TAKE THE EXAM: 110 minutes

LOCATION: Online (Canvas)
What you need for the exam:

▪ A reliable internet (avoid unreliable public Wi-Fi)
▪ A reliable computer (avoid doing the exam on your phone or tablet)
▪ Use Chrome or Firefox browsers (Safari does not work well with Canvas)
o Internet and/or computer problems do not count as valid excuses
for not taking or completing the exam.
▪ A pencil and some scratch paper
▪ A nonprogrammable calculator (you may not use your phone on the exam)
About the exam:
▪ 30 multiple choice questions
▪ 6 or 7 short-answer and/or problem (calculations) questions
▪ Some questions may require drawing and uploading graphs
▪ The exam is closed book/closed notes


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Recommended preparation for the final exam

▪ Review all the notes and be sure you understand the main concepts and examples
(Note: focus on the chapters listed on the study guide below)
▪ Review your quizzes and midterm exams
▪ Watch the recorded Zoom lectures (Login to Canvas and click on Media Gallery)

What if you miss the schedule exam
▪ If you miss this final exam and have a verifiable valid excuse, you will be
scheduled for a makeup exam with no penalty on your grade.
▪ The makeup exam will be an in-person (pencil & paper) exam
▪ Students who miss the final exam must request a deferred grade (DF).
▪ The makeup exam might be scheduled for some time early next semester.


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Study Guide for the Final Exam
Chapter 4: Public Goods

▪ Understand the characteristics of pure public goods – nonrival and
nonexcludable in consumption.
▪ Understand the key differences between public goods and private goods
▪ Understand the difference between pure public goods and impure public
goods
▪ Understand the condition(s) for efficient provision of public goods and how it
differs from private goods [MC = MRS1 + MRS2 + …+ MRSN]
▪ Understand the intuition behind vertical summation of individual demand
curves for a public good.
o You should be able to calculate the efficient output of a public good
given individual society members’ willingness to pay for different
quantities of the good and the marginal cost of providing the public
good. [See the Adam and Eve fireworks example in the notes].
▪ Understand why the private market may not provide an efficient amount of a
public good.
▪ Understand why the private market may not provide an efficient quantity of
a nonrival BUT excludable public good
▪ Understand circumstances in which the private market may overcome the
free rider problem associated with public goods provision.

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Chapter 5: Externalities

▪ Be able to define and describe an externality problem
▪ Understand the difference between a negative externality (external cost) and
a positive externality (external benefit)
▪ Understand why externalities exist
▪ Understand how to graphically illustrate an externality problem (both
negative and positive externality).
▪ Clearly understand all the concepts related to the discussion of externalities
including:
o Marginal private cost (MPC)
o Marginal damage (MD)
o Marginal social cost (MSC)
o Marginal benefits (MB)
o Marginal external benefit (MEB)
o Marginal social benefit (MSB)
▪ Understand how to calculate market equilibrium price and quantity (when
the externality is not taken into account)
▪ Understand how to calculate the socially (economically) efficient output of a
good whose production or consumption generates an externality and
calculate the corresponding price.
▪ Describe the market-based responses to negative externalities including:
o Bargaining (Coase Theorem)
o Mergers
o Social conventions

▪ Understand and describe public responses to the negative externality
problem including:
o The Pigouvian Tax (per unit tax on output)
o Should be able to calculate the per unit tax required to correct the
externality and graphically illustrate the tax.
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o Be able to identify the problems of implementing the Pigouvian tax.

▪ The [Pigouvian] Subsidy
o Calculate the per unit subsidy necessary to correct a negative
externality [how much per unit would have to be given to the
producer to reduce their output to the socially/economically efficient
level]
o Graphically illustrate the Pigouvian subsidy.

▪ Understand the difference between the Pigouvian tax and an emissions fee
▪ Demonstrate (graphically or otherwise) how an emissions fee could lead to a
socially efficient level of pollution.
▪ Understand how cap-and-trade works to reduce emissions/pollution
[Note that in a cap-and-trade system, equilibrium is reached when the
marginal cost of reducing pollution is the same for all producers that are
participating in the market for permits]
▪ Understand the command-and-control regulations of dealing with
externalities
o Production technology standards
o Performance standards

▪ Positive externalities
o Definition
o Why free markets tend to underprovide or under-consume goods that
generate external benefits/positive externalities.
o Ways to correct the market failure associated with positive
externalities
▪ Consumption subsidies
▪ Production subsidies
▪ Regulations (e.g. requiring every able person to go to school; or
take immunization shots, etc.)
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Chapter 8: Cost-Benefit Analysis (CBA)

▪ Understand the concepts of present value (PV) and future value (FV)
o Should be able to project present dollars into the future [FV = PV ×
(1+r)t]
o Should be able to project future dollars into the present [PV =
FV/(1+r)t]
o Be able to calculate the present value of a stream of future income

▪ Measuring costs – costs as opportunity costs of inputs
o Measuring costs of inputs sold in competitive markets
o Measuring costs of inputs sold in imperfect markets
▪ Choosing the discount rate
o Discount rate used in private sector projects CBA
o Discount rate used in public sector projects CBA (Social Discount rate)
o Government discounting in practice
▪ Measuring benefits of public projects
o Valuing time saved using market-based measures (wages)
o Using survey methods to value time (Contingent valuation)
o Using revealed preference to value time saved
o Using wages to value lives saved (the value of a statistical life)
o Using surveys (contingent valuation) value a statistical life
o Using revealed preference to value a statistical life
o Using compensating differentials to value a statistical life
o Using government revealed preference to value a statistical life
▪ The Decision: The Net Present Value Criteria
▪ The Decision: Internal Rate of Return
▪ The Decision: Benefit-Cost Ratio


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Chapters 9: The Health care Market

▪ Sources of inefficiency in the U.S. health care system
o High administrative costs
o Differences in regulatory controls (compared to other developed
nations)
o The intensity of treatment

▪ The role of health insurance and how it works
o How private health insurance works – deductible, copayment, and
coinsurance.
o Employment-based health insurance: why do employers provide
health insurance to their workers?
o Nongroup insurance
▪ Potential adverse section in nongroup insurance
▪ Higher administrative costs associated with nongroup
insurance
▪ Why are people willing to buy insurance?
o Consumption smoothing
o The expected utility model (see the Emily example in the notes)
o Be able to calculate actuarily fair insurance premium
o Calculate the loading fee
o Calculate expected utility without insurance
o Calculate expected utility with insurance
o Determine whether the individual should fully insure at the actuarily
fair premium.
o Calculate the most (maximum premium) an individual would be
willing to pay for full insurance coverage.
o Calculate the risk premium



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▪ Information problems in the health care market
o Understand the problem of asymmetric information and adverse
section in the health care market
o Understand the concept of moral hazard and its cause(s) in the
market for health care.
o Understand the other information problems in the health care market
that we discussed in the lecture.
o Externalities in the health Care market
▪ Efficiency versus equity

o The problem of the uninsured

Chapter 10: Government and the market for health care

▪ Medicaid/CHIP Program for Low-Income Families
o Know the basic structure of the Medicaid Program
▪ Who is eligible for Medicaid benefits?
▪ Administration of Medicaid
▪ Financing of Medicaid.
▪ Health benefits covered by Medicaid
▪ How providers get paid or reimbursed
o Benefits of Medicaid
▪ Financial protection
▪ Improvement in health (affected by take-up and crowd-out)

▪ Overview of Medicare
o Eligibility - who receives Medicare services?
o Benefits – what services are covered?
o Understand the components of Medicare – Part A, Part B, and Part D
o Funding of Medicare – where does the money come from?
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o Cost control under Medicare
▪ The retrospective system – know what this means
▪ The Prospective system – know what this means
▪ Know what is meant by diagnosis related groups (DRGs)
▪ Know the basic facts about the affordable care Act (ACA) of 2010
o Key provisions
Taxation in the United States: A general overview (includes
parts of chapter 17 in “Public Finance” by Rosen and Gayer)

▪ Types of Taxation
o Taxes on earnings
o Taxes on individual income
o Taxes in corporate income
o Taxes on wealth
o Taxes on consumption
▪ The structure of the Individual Income Tax system in the United States
o Taxable income (tax base): see lecture example on computing the tax
base.
o Above-the-line deductions
o Adjusted gross income (AGI)
o Exemptions and deductions (standard deduction versus itemized
deductions.
o Rate schedule: tax rates and taxes owed
o Tax credits
▪ Alternative minimum tax (AMT)
o AMT exemption
o Alternative minimum tax income (AMTI)
o AMT rate schedule
o Tentative AMT

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▪ Measuring the Fairness of Tax systems
o Average tax rates and marginal tax rates (see example in the notes)
o Vertical equity and horizontal equity
o Measuring vertical equity
▪ A progressive tax system
▪ A proportional tax system
▪ A regressive tax system
▪ Defining the tax base: What should be counted as income?
o The Haig-Simons (H-S) definition of income
▪ Income (I) = consumption (C) + change in net wealth (NW).
▪ The H-S definition of income and vertical equity
▪ The H-S definition of income and horizontal equity
▪ Practical challenges in implementing the H-S definition of income
• How do we define ability to pay?
• Dealing with expenses of earning income (business
expenses)
▪ Externality rationale for deviating from the H-S definition
• Charitable giving: Private provision of public goods as
justification for the charitable giving deduction
• Housing: justification of the mortgage interest deduction
on the basis of externalities associated with
homeownership

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Chapter 19: The Corporation Tax

▪ Understand what is meant by a corporation and the concept of limited liability
▪ Understand at least two reasons in support of separating the corporate tax
from the personal income tax system.
o Understand the key difference between a corporate income tax and a
pure profit tax
▪ Understand the treatment of depreciation under the corporate income tax
system in the United States.
o Be able to describe the difference between economic depreciation and
depreciation in practice as it relates to the corporate tax in the United
States.
o Understand the difference between the straight-line and accelerated
depreciation methods of calculating depreciation allowances.
o Understand the meaning of expensing an asset or investment
o Understand the implications of receiving depreciation allowances
sooner from the viewpoint of a firm.
▪ Understand the treatment of interest payments under the corporate income tax
system in the United States.
▪ Understand the meaning and effect of tax credits on a company’s tax liability.
▪ Be able to briefly describe the incidence of the corporate tax (who do you
expect to actually bear the economic burden of the corporate tax?)
o Be able to describe and illustrate on a graph the impact of the corporate
tax on investment (see Figure 19-3 in the notes)
o Be able to describe and illustrate on a graph the impact of the
depreciation allowances and tax credits on investment (see Figure 19-4 in
the notes). {Reducing the marginal cost to ( + )  [1 – (t  z) - ].}
▪ Understand the meaning if effective tax rate and be able to calculate it (see
examples in the notes).
=
( ) − ( )
( )

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• With depreciation allowances and investment tax credits, the ETR
is given by the following:

=
[ − ( × ) − ]
[ − ( × ) − ]


▪ Be able to describe the potential impact of the corporate tax on firms financing
decisions (choice between debt and equity – see Figure 19-5 in the notes)
o Understand and describe the reasons why firms may not want to finance
all their investments with debt (look at the illustrative example in the
notes)
▪ Understand the potential effects of taxing dividend income
o May reduce dividend payout
o May lead to firms choosing debt over equity

▪ Understand what is meant by a multinational firm
▪ Understand what is meant by a subsidiary

▪ The two approaches to taxing corporate income earned abroad
o The territorial system versus the global system
o Understand the meaning of the foreign tax credit in the U.S. corporate
tax system before the 2017 reforms.

▪ Before 2017, did U.S. multinational companies pay the same corporate tax rate
regardless of where the income is earned? NO.

o Reasons:
▪ Ability to delay tax payment (Foreign dividend repatriation)
▪ Transfer pricing (and a related concept of corporate inversion)

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Chapter 14: Taxation and Income Distribution

▪ Meaning of incidence of a tax
▪ Statutory incidence versus economic incidence of a tax
▪ Balanced budget incidence of a tax
▪ Measuring tax progressivity (also in the preceding chapter)
▪ Average tax rates and marginal tax rates (once again!)
▪ Proportional tax
▪ Progressive tax
▪ Regressive tax
▪ Know the 2 measure of tax progressivity discussed in the lecture
▪ The incidence of a unit tax levied on the buyer (demand side)
▪ Be able to analyze the unit tax incidence on a demand/supply graph
▪ Calculate before-tax and after-tax market equilibrium values from demand
and supply functions.
▪ Determine the share of the tax paid by the seller and the share paid by the
buyer
▪ Calculate tax revenue collected by government
▪ The incidence of a unit tax levied on the seller (supply side)
▪ Be able to analyze the unit tax incidence on a demand/supply graph
▪ Calculate before-tax and after-tax market equilibrium values from demand
and supply functions
▪ Determine the share of the tax paid by the seller and the share paid by the
buyer
▪ Calculate tax revenue collected by government
▪ The incidence of a unit tax and price elasticity of demand and supply
▪ Who pay the tax when supply is perfectly elastic?
▪ Who pays the tax when demand is perfectly elastic?
▪ Who pays the tax when supply is perfectly inelastic?
▪ Who pays the tax when demand is perfectly inelastic?

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▪ If ΔP is the share of the tax paid by the buyer:
∆ = (

−
) ×
This also means that the seller’s share of the tax = − ∆

▪ If ΔP is the share of the tax paid by the seller:
∆ = (

−
) ×

▪ Note that in this case ΔP will be negative. The reason for the negative is
because the price received by the seller is reduced by the seller’s portion
of the tax (ΔP).
▪ This also means that the buyer’s share of the tax = + ∆ (keeping
in mind that ΔP is negative)
▪ Understand the effect of unit taxes on monopoly profits
▪ Profit taxes – understand why profit taxes fall entirely on the owners of a
business
▪ Understand the concept of capitalization in relation to tax incidence (say, the
incidence of a tax on transferable property like a real estate asset)
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Chapter 15: Taxation and Efficiency

▪ Understand the concept of excess burden (aka welfare loss or deadweight loss)
▪ Understand what is meant by equivalent variation
▪ Understand why a lump sum tax has no excess burden
o Understand why lump sum taxes are not common despite being very
efficient taxes (create no excess burden)
▪ Understand how to measure excess burden with demand and supply curves
▪ Be able to calculate excess burden from a set of demand and supply functions
▪ Understand the determinants of excess burden
▪ Price elasticity of demand (and supply)
▪ The tax rate (EB increases exponentially with an increase in the tax rate)
▪ Total expenditure on the good (P x q)


▪ Excess burden of a tax on labor income