Quiz 4 Public Economics May 2021

1. True or False?
(a) During the year of 2020, there has been both a decrease in the number
of deaths in road accidents and an increase in the sales of electric cars.
We can therefore conclude that electric cars are safer.
False. Coincidence, not causality.
(b) The decrease in the number of births in 2021 is caused by working from
home, which decreased matching opportunities for single individuals.
False. Coincidence, not causality.
(c) The following is taken from the website of Oxfam. “Oxfam is a global
movement of people, working together to end the injustice of poverty.
That means we tackle the inequality that keeps people poor. Together,
we save, protect and rebuild lives when disaster strikes. We help people
build better lives for themselves, and for others. We take on issues like
land rights, climate change and discrimination against women. And
we wont stop until every person on the planet can enjoy life free from
poverty.”
i. Oxfam is not a lobby because it pursues an objective which is
good for the population. False. It is a lobby, it pursues
the objective of influencing government’s decision.
ii. Oxfam’s interventions decrease gender discrimination in developing
countries. False. No proper policy evaluation provided to
sustain the claim.
iii. It may be useful for governments and international institutions
to consult with Oxfam to gather information about woman em-
powerment in some developing countries. True. Lobbies can be
useful to provide information.
(d) “Moving to Opportunity for Fair Housing (MTO) was a randomized so-
cial experiment sponsored by the United States Department of Housing
and Urban Development in the 1990s among 4600 low-income families
with children living in high-poverty public housing projects. Families
were randomly assigned to 3 groups. One received housing vouchers
that could be used only in low-poverty areas for the first year as well as
counselling to help them find units there. One group received vouchers
that could be used anywhere but no counselling. A third (control) group
did not receive vouchers but remained eligible for any other government
assistance to which they otherwise would have been entitled.”
i. In order to infer the impact of the neighbourhood on the educa-
tional outcomes of children, it suffices to compare the results ob-
tained by children who live in low poverty areas with those that live
in high-poverty areas. False. Selection bias in the choice
of housing.

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Quiz 4 Public Economics May 2021

ii. MTO is an example of a randomised controlled trial. True.

iii. The advantage of the design of the MTO is that it allows to test
the impact of the neighbourhood on the children and adult out-
comes while eliminating the selection bias concern. True, thanks
to the Randomised Controlled Trial design.
iv. It is important that we test the impact of the neighbourhood of res-
idence in outcomes such as children’s school grades, adults’ labour
market participation, criminal behaviour and so on, in order to
improve the design of housing policies. True.
v. The families in the control group are an appropriate counterfactual
to those in the two treatment groups. True.
2. Alcohol consumption is know to have negative impacts on road safety. The
government is considering imposing a fine on the individuals that drink and
drive. For each individual, the marginal benefit from each drink is given by
b = 2 and the marginal cost from each additional drink (that includes health
costs, negative consequences, e.g., relating to road safety, and the monetary
cost of the drink) are given by c = d, where d is the number of drinks. The
public health and road safety authorities estimate that the marginal cost for
the society of each additional drink drank by the individual is given by 1.
Suppose that in this country there are 10 million individuals who drink and
drive, and that the alcohol producing firms make a marginal profit of 50
cents for each drink that they sell.
This question has been solved in class -- pls refer to handwritten
PDF on moodle.
(a) Select the true sentences about the individual drinking cost. (List of
options given on Moodle)
(b) How many drinks will each individual drink if she decides on her own?
(c) What is the social optimal number of drinks of each individual?
(d) The government is considering imposing a fine on the individuals that
drink and drive. The police makes random checks on the drivers and
estimates that it catches one in each four individuals that drink and
drive. This information is well known by the population. How much
should the fine be, in order to induce the individuals that drink and
drive to consume the socially optimal amount of drinks?
(e) How much do the alcohol producers have to lose from this fine?
(f) How much are the alcohol producers willing to spend in lobbying activ-
ities to convince the government not to implement this fine?
(g) If the firms do lobby the government and spend the maximum that they
would be willing to spend, and the government does fail to implement
the fine, what is the total social cost of the lobbying activity?