Exercises
Suggested solutions
, Chapter 1 – Exercises and
suggested solutions
1. Imagine that you live in a city that currently does not require bicycle riders to
wear helmets. Furthermore, imagine that you enjoy riding your bicycle without
wearing a helmet.
a. From your perspective, what are the major costs and benefits of a
proposed city ordinance that would require all bicycle riders to wear
helmets?
b. What are the categories of costs and benefits from society’s perspective?
, Chapter 1 – Exercises and
suggested solutions
2. The effects of a tariff on imported kumquats can be divided into the following categories:
tariff revenues received by the treasury ($8 million); increased use of resources to produce more
kumquats domestically ($6 million); the value of reduced consumption by domestic consumers
($4 million); and increased profits received by domestic kumquat growers ($5 million). A CBA
from the national perspective would find costs of the tariff equal to $10 million-the sum of the
costs of increased domestic production and forgone domestic consumption ($6 million + $4
million = $10 million). The increased profits received by domestic kumquat growers and the
tariff revenues received by the treasury simply reflect higher prices paid by domestic consumers
on the kumquats that they continue to consume and, hence, count as neither benefits nor costs.
Thus, the net benefits of the tariff are negative (-$10 million). Consequently, the CBA would
recommend against adoption of the tariff.
a. Assuming the agriculture department views kumquat growers as its primary constituency,
how would it calculate net benefits if it behaves as if it is a spender?
b. Assuming the treasury department behaves as if it is a guardian, how would it calculate net
benefits if it believes that domestic growers pay profit taxes at an average rate of 20 percent?
Suggested solutions
, Chapter 1 – Exercises and
suggested solutions
1. Imagine that you live in a city that currently does not require bicycle riders to
wear helmets. Furthermore, imagine that you enjoy riding your bicycle without
wearing a helmet.
a. From your perspective, what are the major costs and benefits of a
proposed city ordinance that would require all bicycle riders to wear
helmets?
b. What are the categories of costs and benefits from society’s perspective?
, Chapter 1 – Exercises and
suggested solutions
2. The effects of a tariff on imported kumquats can be divided into the following categories:
tariff revenues received by the treasury ($8 million); increased use of resources to produce more
kumquats domestically ($6 million); the value of reduced consumption by domestic consumers
($4 million); and increased profits received by domestic kumquat growers ($5 million). A CBA
from the national perspective would find costs of the tariff equal to $10 million-the sum of the
costs of increased domestic production and forgone domestic consumption ($6 million + $4
million = $10 million). The increased profits received by domestic kumquat growers and the
tariff revenues received by the treasury simply reflect higher prices paid by domestic consumers
on the kumquats that they continue to consume and, hence, count as neither benefits nor costs.
Thus, the net benefits of the tariff are negative (-$10 million). Consequently, the CBA would
recommend against adoption of the tariff.
a. Assuming the agriculture department views kumquat growers as its primary constituency,
how would it calculate net benefits if it behaves as if it is a spender?
b. Assuming the treasury department behaves as if it is a guardian, how would it calculate net
benefits if it believes that domestic growers pay profit taxes at an average rate of 20 percent?
