ECON 5822: Urban and Regional Economics
Study Guide for Final
Major Topics:
1) Autos and Externalities
- Private costs and external costs associated with congestion
- Determining the optimal level/inefficiency area associated with private outcome
i. Calfee and Winston paper on congestion
- Policy options
i. Improving fuel efficiency (MPG vs. GPM)
ii. Congestion taxes
iii. Gas taxes
iv. Subsidize public transit
- Externalities associated with air pollution
i. Policy options
- Externalities associated with accidents
i. Moral hazard
ii. Why insurance doesn’t solve the problem
iii. Vehicle Miles Traveled Tax
2) Mass Transit
- Why is ridership larger in some cities than others
- Why it has decreased over time
- Different elasticities associated with mass transit
i. How these relate to effective ways to increase ridership
ii. Evaluating effects of different policies given cost table
- The natural monopoly dilemma and subsidization of public transit
3) Crime and Drugs
- The rational criminal model
- Ways to decrease crime
- Determining the efficient level of crime
i. The principle of marginal deterrence
- Levitt paper on why crime dropped in the 1990s
- Roles of prisons
- Drug policies and elasticity
i. Williams paper on marijuana legalization
- Likely impacts of legalization
4) Housing
- Hedonic equations
i. Interpreting regression coefficients and calculating error terms
ii. Lin – lin and log – lin model interpretations
- Housing abandonment
i. Marginal costs vs. marginal benefits associated with quality investment
ii. Accordino and Johnson paper
iii. Externalities associated with abandonment
iv. Situation in Youngstown and policy options
1. Demolition
a. Sharonline
- Housing filtering
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Housing policies
i. Mortgage subsidies
ii. Public housing
iii. Housing subsidies
iv. Housing vouchers
v. Rent control
5) The equi-marginal principle
Practice Problems
Note: The final exam will consist of 35-40 multiple choice questions and approximately 14 short
answer questions.
1. You have been assigned the task of estimating the social trip cost at a traffic volume of 1,600
vehicles per lane per hour for a one-mile section of an urban freeway between two exits. You
have traffic data for the relevant stretch of highway for the last year. Outline a strategy for
computing the social trip cost. What information would you collect and how would you use it?
2. Consider a city that has both a congestion problem (it does not have a congestion tax) and an
auto pollution problem (drivers do not pay for the pollution they generate).
a. Draw the private-trip-cost curve and the social-trip-cost curve.
b. Label the optimum volume V* and the equilibrium volume V0.
c. Suppose the city builds a light-rail transit system and subsidizes light-rail fares. Depict
graphically a situation in which the subsidized light-rail system generates an auto volume of V*.
d. Does the fact that the light-rail system generates the optimum auto volume mean that it is an
efficient policy?
3. Suppose the demand for driving in a month for a driver is given by MPB = 10 – 0.1Q.
Private costs are constant at $3, and social costs are constant at $3.70.
a. How many miles will this person drive in a month?
b. What is the inefficiency associated with this amount of driving?
c. What is the efficient vehicle miles traveled tax to correct for this inefficiency?
4. Explain why improving safety features in automobiles is not an efficient policy to address the
accident externality associated with driving.
5. The price elasticity of demand for public transit equals -0.33. Consider a city with an initial
fair for public transit of $1.50 and an initial ridership of 120,000. Suppose the city cuts its transit
fare to zero. What is the total ridership after they reduce the fare to $1.00?
7. Political candidates often claim that they are “tough on crime” advocating harsher sentences,
more police officers, etc.
a. Using the general crime cost/benefit graph, explain how whether being tough on crime is a net
cost or a net benefit to society.
b. Will an increase in marginal prevention costs increase or decrease the efficient level of crime?
Explain.
8. Critically appraise the following: “The social cost of armed robbery is about six times the
social cost of burglary. According to the principle of marginal deterrence, the length of the prison
term for armed robbery should be six times the length of the prison term for burglary.”
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9. a.) How and why has the number of people imprisoned changed over the last 30 years?
b.)What are the 4 functions of prisons?
c.) Explains why most economists would that the number of people in prison is greater than the
efficient level?
Critically appraise this statement: “Studies have shown that higher levels of incarceration has
reduced violent crimes by approximately 20%. Clearly society is better off as a result of these
higher levels of incarceration.”
10. List the pros and cons associated with legalization of marijuana.
11. Given our discussion of the market for illegal drugs, should policy, which is intended to
reduce usage be more supply or demand oriented? Explain why using a basic market diagram to
illustrate your answer.
12. If a drug is legalized, under what condition would the price of that drug increase? Under
what condition would the price of that drug decrease?
13. The following represents the estimated results from a hedonic equation:
Y = 200,000 + 4,500*X1 + 300*X2 – 2,500*X3 (+-) B4*X4
Where:
Y is the market price of a home
X1 is the number of bathrooms
X2 is the size of the lot in square footage
X3 is the age of the home
X4 is distance to the major employment center
a.) Explain the meaning of the coefficient on X1, the number of bathrooms.
b.) What do you expect for the value of the coefficient on X4?
c.) Suppose Y were given as the natural log of the market price of a home. How would you
interpret the coefficient on X4.
d.) Name two other variables that might be relevant to include as explanatory variables in
this equation.
14. Explain why the average quality of housing is higher in the Western U.S. (California or
Oregon) compared to in the Midwest U.S. (Ohio or Michigan). Illustrate your answer using a
MC/MB graph.
15. What policy alternatives do policymakers have when it comes to how to address abandoned
housing? Why can abandoned housing not be addressed in the same way other negative
externalities are addressed.
16. If policymakers have a set budget equal to $1,000,000 to devote to the demolition of
abandoned homes, what should they consider in deciding which neighborhoods/homes to target?
17. What are the major issues associated with public housing? What is the major issue
associated with subsidies for private housing? Why do most economists prefer housing vouchers
over the alternatives in order to improve housing affordability for the poor?
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18. Explain why most economists believe that the home mortgage interest deduction is not an
effective policy when it comes to its intended goal of increasing homeownership? What are the
economic costs associated with the mortgage interest deduction?
19. Consider the effects of rent control in two cities, each of which imposes rent control with a
maximum price of $400, compared to the equilibrium price of $500. In Elastic City, the price
elasticity of supply of housing is 5.0. In Inelastic City, the supply elasticity is 0.4.
a. Which city will experience a larger reduction in the quantity supplied of housing?
b. Which city will experience a larger deadweight loss from rent control?
20. The following table reflects the total benefits of money (in thousands) spent on healthcare,
crime, or education.
Healthcare
Crime
Education
Amount Spent ($)
Benefits
Benefits
Benefits
1
4
6
10
2
7
11
15
3
10
15
18
4
12
18
20
5
14
21
21
6
16
23
22
7
17
24
22
8
18
25
22
9
19
26
22
10
19
26
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a. If you, as a policymaker, have $10,000 to spend, how much should you spend on each policy?
What are the total and net benefits?
b. Even if you had no limit on what you could spend, what is the maximum amount you would
want to spend in total?
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