Category: Syllabus

In my opinion Thomas C. Schelling (1921-2016) has achieved something greater than the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel (2005). The history of economics will remember him as the very model of a modern thinking economist’s economist.

The earlier post for the reading list and final exams from his 1970 Harvard course “Conflict, Coalition and Strategy” has been viewed nearly 19,000 times, making it the highest single post in the eleven year history of Economics in the Rear-view Mirror.

The purpose of today’s post is to provide a digital, transcribed version of Schelling’s 1981 course materials for “Economic Principles and Public Policy” assembled from a PDF file of the scanned copy of this material compiled and published by Ed Tower in his Eno River Press Collection in Economics. In this form, it will be even easier to access, search, copy, and paste from. 

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Where to Find the Motherload

The Eno River Press Collection in Economics, compiled by Duke professor (now emeritus) Ed Tower, is the motherload of syllabi, problems sets, and exams from economics courses taught over roughly two decades at the end of the 20th century. Thanks to the initiative of Steven Medema, this material has been digitized and made available as .pdf files:  1980 (15 vols.); 1981 (25 vols.); 1990 (25 vols.); 1995 (25 vols.). There is an analogous set of volumes, likewise available in business administration.

Professor Ed Tower came to Duke in 1974. He received his Ph.D. in Economics from Harvard in 1971. He has held appointments at the Australian National University, the University of Auckland in New Zealand, the Economics Institute, the Fletcher School of Law and Diplomacy at Tufts University, the Helsinki School of Economics and Business Administration, Nanjing University in the Peoples’ Republic of China, and Simon Fraser University in Canada. He has also consulted on economic development problems at the World Bank and the U.S. Agency for International Development, and in Indonesia, Kenya, Malawi, and Sudan, and has written on development problems in Malaysia, the Peoples’ Republic of China, and Taiwan.
Source: Duke Economics Department, WWW Resource.

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Undergraduate Course

HARVARD UNIVERSITY
Economic Principles and Public Policy
Economics 1021
Spring 1981

T. C. Schelling

Course Outline and Reading Assignments

All readings listed are assigned; none are optional.

Books Required to Purchase:

Robert H. Haveman and Julius Margolis, Public Expenditure and Policy Analysis, second ed. (paperback), Rand McNally, 1977.

Robert Dorfman and Nancy Dorfman, Economics of the Environment, second ed., W.W. Norton and Company, 1977.

Richard Goode, The Individual Income Tax, revised ed. (paperback), The Brookings Institution, 1976.

Charles L. Schultze, The Public Use of Private Interest,
The Brookings Institution, 1977.

Arthur M. Okun, Equality and Efficiency, The Brookings
Institution, 1975.

T.C. Schelling, Micromotives and Macrobehavior, W.W. Norton and Company, 1978.

Harold M. Hochman, The Urban Economy, W.W. Norton and Company, 1976.

Book Required to Obtain:

Your Income Tax, Publication 17, Internal Revenue Service,
not for sale.

Note: The class meets in lecture 13 times before Spring Recess. Reading assignments for the 8 meetings after Spring Recess will be distributed later.  Sections will meet each week except the first week and the week before Spring Recess.

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Outline and Readings

Spring 1981
Course Plan

Source:  Economics Reading Lists, Course Outlines, Exams, Puzzles & Problems compiled by Edward Tower. Vol. 20 (July 1981): Public Choice, Political Economy, and the Economics of Public Policy & Law, pp. 133-137.

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ECONOMIC PRINCIPLES
AND PUBLIC POLICY

M-228 & ECONOMICS 1021
Spring 1981

T. C. Schelling
Harvard University

The Income Tax

            These questions are prompted by a reading of the Form 1040. Some of the questions will be discussed in class, some are for your reflection and study. The purpose is to alert you to the kinds of questions and issues that almost any line in the tax form can raise. Several hours can be devoted to the economic philosophy underlying income taxes, discerning intention, recognizing administrative com-promise, analyzing incentives, and evaluating the income tax as an instrument to achieve a variety of goals. It need not be viewed as a coherent philosophy or a set of integrated and compatible purposes; searching for inconsistencies or obsolete details, and reflecting on historical processes and political compromises, are part of the exercise.

Page 1 of Form 1040

1. Why “income rather than “wealth?”
   What difference does it make whether income or wealth is the subject of the tax?
2. Why is the calendar year the unit of accounting?
   What provisions modify this annual slicing?
   What would be an ideal accounting period, or is there one?
   What incentives result from slicing time into annual units?
3. Should a married couple be treated as a single unit, as two persons, or allowed some choice in how to file?
   Do you perceive any incentives on marriage and divorce?
4. What reason can you think of for the extra exemption for the blind, not for the deaf or the crippled?
   Why might blindness be exactly equivalent to one dependent?
   Should blindness be treated as an exemption or a tax credit?
   What are the differences between this kind of help for the blind and cash grants not related to income?
5. Should the allowance for a dependent be a constant amount of income, irrespective of bracket? Should it instead be graduated, so that the differential between a large and small family at high income is greater than the differential at a lower income? Should it be a tax credit rather than an exemption?
6. Is there an implied philosophy about family, children, and birth, in this treatment of dependents? Does it imply that children are:

1) a consumer good,
2) an insurable accident,
3) a productive asset,
4) a social obligation?

Are there incentives on family size or timing due to this treatment of dependents?

7. What is the argument for including capital gains as a kind of income? Alternatively, what is the argument for not treating them the same as income?
   Why distinguish long-term from short-term? Is this an anti-gambling or anti-speculation bias? Is it expected or intended to have incentives on the holding of securities?
   Why are only “realized” gains taxed, so that if your stock or property rises in value you pay no tax unless you sell it?
   What are the incentives: do people get “locked in” to property holdings that have risen in value, having to hold it rather than exchange it for other stock and property?
   Why is a special exemption made for the sale of one’s own house?
8. Should gambling gains and losses be treated like any other income?
   Should they be ignored altogether and left untaxed?
   Does the treatment discriminate against “pure” gambling but not against gambling on the commodity or stock market?
   Is this treatment consistent with the increasing popularity of state lotteries, off-track and on-track betting, etc.?
   What effect will the treatment of gambling gains and losses have on the ability of legal gambling to compete with illegal gambling?
9. Can you guess what kinds of “employee business expenses” a typical university professor will take credit for on his tax return? Do you expect any incentives, such as the likelihood of having better office equipment, more telephone extensions, better personal libraries, if they are tax-deductible?

Schedule A

10. Itemized deductions: Is there a single rationale for the items deductible? Is it:
    1. 1. to get at a better accounting of income
       2. to encourage expenses of the kinds that have been made deductible.
       3. to compensate for special hardships and obligations;
       4. or what?
11. Why is medical care somewhat deductible?
    How does treatment of medical care discriminate between the poor and the well-to-do?
    Could you estimate the “cost” to the Internal Revenue Service (or to other taxpayers if they would have to make it up in higher tax rates) of this treatment of medical care?
    If you could redistribute an equivalent amount, to compensate people for an injury and illness and disability, would you rather distribute it in a manner unrelated to income or income taxes?
    Can you find a plausible explanation of the quantitative treatment of medical care: e.g., 1/2 of insurance premiums; excess over 3% of income; subtracting out 18 in line 3; etc.
12. How would you prefer to treat funeral expenses? Should sanitary or tasteful disposal of a dead body be treated as a terminal medical expense? Can you think of good reasons for the actual treatment of this item?
13. What contributions are tax-deductible, and why?
    Is this equivalent to a subsidy of churches by the federal government?
    Is the object to stimulate contributions?
    Is this a useful way to decentralize federal subsidies, by a system of “matching grants” to anybody who wants to support his favorite charity?
    Who has more leverage in determining where the IRS makes its contributions, a poor or a rich person?
14. What do you think are the most questionable “contributions,” the ones about which it is hard to decide whether they are within the spirit of the income tax?
    Is it a “contribution” if I make a sizable gift to a private school in hopes that they will give priority admissions to my children?
    Can I unload a library that I’ve grown tired of, and treat it as a cash “gift” to the University?
    Suppose I make the gift and the recipient throws it away?
    Suppose I make a “gift” to a nursing home that is really a disguised bill for the care of an aged relative, but the nursing home winks and lets me “pay” the bill in a tax-deductible way?
15. Why should the interest you pay be deductible? (Interest you receive is taxable.) Does this put a distortion in the incentive structure–regarding, say, mortgaged homes vs. outright ownership–or does it eliminate a distortion?
16. Is the treatment of “casualty losses” equivalent to insurance handled by the Treasury?
    Does it discriminate in favor of the rich, the poor, the property-less, or the property owners?
    Could the treatment of casualty losses have any influence on the insurance that people purchase?
    If I smash my car and somebody else’s, and he sues me for damage and I pay, should both parts of the loss be deductible, or only the damage to my own car?
17. Why allow deductions for taxes paid to state and local government but not other federal taxes?

General Questions

18. It has been argued that employees of the federal government ought not to pay income tax: they are simply returning part of their salary. If they were exempted from tax we could lower their pay to the “after taxes” level, saving them the trouble of making out returns and the IRS the trouble of processing them. Do you see objections to that procedure?
    Do your objections apply equally to state taxation of incomes earned in state employment?
19. Children who are eighteen or younger count as dependents, no matter how much income they had. Should we reexamine this age, as voting ages, draft ages, and ages over which juvenile courts have jurisdiction change as the years go by, and with the increasing independence of teenage “dependents?”
    A child with income abruptly ceases to be a dependent at age nineteen. Would there be advantage in having dependency taper off gradually?
20. In earlier years, military combat pay was excluded from taxable income.
    Why would the federal government prefer to do it that way rather than with an outright pay increase?
    It has recently been proposed to exempt all military pay from federal taxation. What are the reasons for and against?
21. If you and your employer both pay a percentage of your salary into a retirement fund, should your part not be treated as income and subject to taxation? Should his?
    If the retirement fund invests it, should the accrual of interest and dividends to your retirement account be currently taxable?
    How much flexibility should the IRS allow you in putting part of your income into a retirement fund, temporarily beyond reach of the income tax?
    Suppose your retirement fund permits you to withdraw from it in an emergency? Does that make it just an investment fund to escape the income tax?
    Suppose you cannot withdraw it but you can borrow against it.
    Is it only a pretense that it is still there and you have not drawn it down to spend it?
    What general purpose do you see in permitting contributions to a retirement account to evade immediate taxation, but not any other form of saving that is invested for the sake of deferred consumption? Is this just another subsidy for incentives, or is there some logical reason to exempt this contribution, as being not “earned” until one is legally able to draw on it after retirement?
22. Consider some income that is not subject to tax–either legally immune, or just practically uncollectible (evasion being easy and people willing to evade in the belief that others do).
    Specifically, tips to waiters and waitresses. who do you think benefits from untaxed tips?
    What do you think the effect is on waiters’ wages and the prices of restaurant meals? Does your answer depend on the income earned by waiters?
    Think of some untaxed fee or salary supplement in a high income bracket, and answer the same question–e.g., untaxed fees of abortionists when abortion was illegal.
    Can you make any general proposition about who benefits to what extent when any identifiable kind of income goes untaxed, either because it is legally exempt or because the tax is regularly evaded?

Beneficiaries and Incentives

23. Select some disadvantaged or underpriviledged group that you would like to help with extra income at government expense.
    1. What is the best device you can think of that might be incorporated in the income tax to serve that purpose?
    2. Compare that income-tax measure with the best alternative measure (not involving the income tax) that would serve the same purpose.
    3. How much of the tax benefit (i.e. the tax loss to the government) is likely to go to the people whom you did not especially wish to receive the benefit? How serious an inefficiency is that?
    4. How many of the people you would like to help are not reached by your proposed tax measure, and how serious is that inefficiency?
24. Select an activity that you would like to stimulate at government expense.
    1. What is the best device you can think of that might be incorporated in the income tax to serve that purpose?
    2. Compare that income-tax measure with the best alternative measure (not involving the income tax) that would serve the same purpose.
    3. How much of the tax benefit is likely to go to taxpayers whose activity is unaffected by your income-tax measure?
    4. How would you estimate the amount of the desired activity (measured perhaps in the increase in taxpayer expenditure on it) induced per dollar of lost tax revenue?
25. Discuss the incentives in the income tax that affect the following. Indicate the direction in which they affect it, the likely magnitude of the effect, and the desirability of the incentive effect:
    1. owning a home, or renting;
    2. doing work around the house rather than hiring it done;
    3. diverting wages and salaries into institutionalized retirement arrangements;
    4. choosing among savings accounts, bonds, stocks, and real estate;
    5. purchasing collision-damage auto insurance;
    6. having another child;
    7. housewives taking full-time jobs and getting sitters, housekeepers, cleaning help, etc., to take care at home;
    8. choosing one’s occupation.
26. What in the income tax do you think affects the way Harvard University is administered? (For example, the health service, retirement arrangements, providing expenses rather than income to faculty, granting scholarships).
27. Income Tax Work Incentives
    It has been argued that an income tax induces people to work less because it reduces their net hourly compensation. A person who can do extra work at $7.50 per hour may not do it if he keeps only $5.
    It has also been argued that an income tax induces people to work more because it lowers their net income for any amount of work they do; to maintain desired standards of living the income tax leaves them no choice but to work more.
    How would you resolve the dispute, either choosing one of these two points of view, denying them both, or finding some reconciliation between these two opposing arguments?
28. Taxes and the Ability to Pay
    It has been argued that the income tax is unique among taxes in discriminating according to “ability to pay.” why, then, should there be additional taxes unrelated to the ability to pay? There are other taxes and they add up to as much as the income tax. Of course, in politics nobody’s perfect, and we needn’t be surprised that “ability to pay” is honored and violated at the same time. Still, there may be good reasons why an income tax is not or cannot be relied on as the sole source of revenue.

1. 1. 1. How successfully does it tax people on their “ability to pay?”
      2. Give some good reasons for not expecting the income tax to be able to serve as the unique, universal, all-purpose tax.

• 29. Child Dependency Allowance
      The present income tax allowance for children is that $1000 per child can be deducted from income before calculating the tax. In taxes saved, a child is worth more in a high-tax bracket than in a low bracket. On the other hand, the expenses attributable to an extra child for a family with an income of $15,000 is probably much closer to the $1000 allowance than are the expenditures attributable to an extra child in a family of similar size with an income of $60,000.
      It can be argued that the difference between no children and three children at a family income of $60,000 is far greater than the $1000 per child allowed as untaxable income, and that it makes sense to enlarge that allowance at higher incomes.
      It can also be argued that raising the allowance at higher incomes will reduce the progressivity of the tax, allowing just another benefit to wealthier families while poorer families would get no such relief.
      1. Explain how you would choose between these two points of view, or reconcile them, in recommending how to handle children in the income tax.
      2. would your answer to (a) be any different if the dependency allowance were a tax credit rather than a deduction from income?

30. A tax is called “progressive” if the amount paid rises more than proportionally to income, “regressive” if less, and “proportional” if the ratio of tax to income is uniform. The word “progressive” also suggests “fair” or “liberal” and “progressive income tax” tends to have both meanings. with either meaning it is sometimes hard to determine which among two or more tax schedules, or changes in a tax schedule, or more or less “progressive,” or exactly what change in rates should be characterized as preserving the same progressivity.
    Below are six income-tax schedules.
    Indicate how you would go about ranking them, or comparing them, in their “progressivity.”
    Would you need to know something about the underlying distribution of income to make the comparison?
    If so, explain.

Compared with Schedule A:

Do one or more of the schedules raise or lower all taxes in the same proportion? Which ones?

Do one or more raise or lower all taxes by the same proportion of income? Which ones?

Do one or more raise or lower all income after taxes in the same proportion? Which ones?

Does one or more of them have the same progressivity as A?

Do any two of them have the same progressivity as each other?

Among them all, including A, which is least progressive and which most, and how do you rank the others?

NOTE: Because the rates go stepwise, any change will affect somewhat differently people at different points within a bracket. I suggest you make the comparisons at the bracket limits, i.e. at $6, $12, $24, $48, $100, and $200.

Source: “The Income Tax”. Photocopy reproduced in Economics Reading Lists, Course Outlines, Exams, Puzzles & Problems compiled by Edward Tower. Vol. 12 (July 1981): Public Finance Exams, Puzzles & Problems, pp. 9-17.

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T. C. Schelling/Harvard University
ECONOMIC PRINCIPLES
AND PUBLIC POLICY
Spring 1981

Ec. 1021
M- 228

EXAM QUESTIONS FROM EARLIER YEARS

1. Proposed Policies for Evaluation
2. Swine Flu Vaccination
3. 55-Mile Speed Limit
4. Worth of Saving Lives
5. Crime Rates and Police Coverage
6. Fire Protection
7. Smoking in Class
8. Saturday Sections
9. Apartment House Heating
10. Deposit on Cans and Bottles
11. Smoking in Class: Another Room
12. Library Air Conditioning
13. State-University Tuition
14. Nursery Schools
15. Youth Fare
16. Welfare and Work Incentives
17. Dining Hall Problem
18. University Parking
19. Vouchers, Goods- (services)-in-Kind, or Cash
20. Gasoline Mileage
21. Elasticity of Response
22. Property-Tax Exemption for Veterans
23. Incentive Effects of Private Insurance
24. Overbooked Airline
25. Environment in the USA and the USSR
26. Insurance and “Moral Hazard”
27. Common Property
28. The City
29. Child Care

*  *  *  *  *  *  *  *  *  *  *  *  *  *  *

1. Proposed Policies for Evaluation

      Without reaching any final conclusion about any of the actual or proposed policies listed below, indicate for each of them one or two important considerations that this course has brought to your attention.

1. 1. 1. Individual fire-detection units have been developed that emit a distinctive noise when fire occurs in a dwelling; they cost about $35. It is proposed that federal funds be offered to the states for refunding $20 per unit, for up to two such units, to any landlord or homeowner purchasing such equipment, in any state that, through its fire-safety authority or its regulation of the fire insurance industry, makes such detection devices mandatory or that severely penalizes the insurance rates of homes without them.
      2. Public provision to low-income persons with specific disabilities, and to the low-income very elderly, of “taxi vouchers,” useable in payment of metered taxi fares, redeemable in cash from the taxi company, in some standard amount calculated to cover some minimum number of trips per month for which such disabled and elderly people would need transportation by automobile.
      3. Cheap postal rates on books.
      4. Free eyeglasses for schoolchildren who need them, li parent’s or guardian’s income is below some specified level (as documented by income tax return).
      5. Free admission to selected Harvard football games for non-academic employees of the University.
      6. Requirement that any disability benefits generally available to company employees be provided also for some specified length of time for pregnancy and child-birth.
      7. The restriction, as presently in Cambridge, of most side street parking to local residents, enforced by parking fines for all vehicles without local-resident stickers,
      8. A provision that Harvard clerical, secretarial, and similar non-teaching staff be authorized, with the permission of their immediate supervisors, to enroll for grade and credit in one undergraduate Harvard course during each academic year, at no charge and with official time off from regular duties during class hours.
      9. Requirement that all new apartment buildings provide separate metering of heat in each individual apartment, with separate thermostat or other controls on heat use.
      10. Preferential hiring of veterans in government jobs.
      11. Federal program to finance welfare benefits so that benefits will be uniform among all 50 states.
      12. Free gymnasium-locker-shower and other athletic facilities made available to all employees of a large corporation, as a fringe benefit of likely value to employee health.
      13. On days when the weather makes it advisable to curtail sharply the volume of traffic on the Mass. Turnpike Extension (from the western suburbs to downtown Boston) put into effect, by radio announcement, the standby rule that cars will be admitted to the turnpike only if the first digit of the license plate is odd or even according as the date of the month is odd or even.
      14. Income-tax deduction or credit for home insulation expenditure.
      15. Life insurance equal to $50 thousand if single, $100 thousand if married, plus $25 thousand for each dependent child, for firemen and policemen killed in the line of duty.
      16. Unemployment compensation treated as “insurance” and not taxable as income.
      17. “Gasoline stamps” (patterned after food stamps) that low-income owners of registered cars and trucks can purchase at a discount, in limited quantities, as a cushion against the impact on low-income people of a federal gasoline tax.
      18. Mandatory deposit of 25¢ on every beer or soft-drink container purchased in Massachusetts, can or bottle, to be refunded upon return to any store where beer or soft drinks are sold, together with requirement that all containers sold in the state carry distinctive ineradicable markings to prevent wholesale turn-in of cans and bottles from outside the state.
      19. Mandatory $25 per year (for three years) increase in automobile insurance premium for every moving traffic for “safe” the proceeds used to reduce insurance rates drivers.
      20. The extra federal income-tax exemption for the blind.
      21. Federal income-tax deduction for contributions to schools.
      22. Rent control for persons over 65, for the disabled, and for certain other disadvantaged tenants.
      23. Exemption from minimum-wage law for youths under 17.
2. Swine Flu Vaccination

      It is nearly forgotten now, but put youself back to January 1977: Forty million people had received swine flu vaccine. It was not clear whether an epidemic of swine flu might yet occur, and there was no final judgment on whether the vaccine itself entailed significant risk. Anywhere from 40 to 400 people were thought to have possibly died in consequence of the vaccine itself. It had been feared that a flu epidemic might ki11 40,000.

      A characteristic of vaccination is that the more successful the program, the less protection anyone needs. If everyone is vaccinated, you don’t need to be. And if the epidemic is averted, vaccination deaths may outweigh flu deaths.

      An important possibility in that January was that there remained a serious risk of swine flu but no sign of it yet, and that the publicity about some real or imagined fatal complications had made doctors afraid to offer the shots, patients reluctant to receive them, and health officials afraid to recommend them.

      Suppose it were January 1977 and you were convinced that comprehensive vaccination could entail some hundreds of deaths from the vaccine, that it could reduce flu deaths by tens of thousands if an epidemic were otherwise going to occur, and that the chance of an epidemic was about one in five if vaccination were discontinued.

      How would you evaluate the risks and benefits of stopping or proceeding with the program?

      What suggestions could you make on ways to induce people to get themselves vaccinated?

3. 55-Mile Speed Limit

      The nationwide 55 mph speed limit that went into effect in 1974 was associated with a reduction in traffic fatalities for which no other explanation has been found. Suppose it becomes established that that speed limit, if enforced, will save three or four thousand lives per year with a commensurate reduction in injuries and automobile damage, but at some cost in truck and auto travel time and some cost of enforcement.

      The deaths and injuries, to say nothing of automobile damage, are worth taking seriously. The costs of slower transport and the lost work or leisure time have to be taken seriously. But I do not know whether the costs and benefits of enforcing the speed limit make the speed limit a good bargain in lives saved, a disproportionate nuisance for a minor reduction in mortality, or a toss-up.

1. 1. 1. How would you help me reach a decision?
      2. Indicate the numerical information you would want to gather and how you would use it in estimating benefits and costs.

4. Worth of Saving Lives

            Consider a costly program that is expected to reduce the likelihood of death within some identifiable segment of the population, and thus reduce statistically the number of deaths within that part of the population. In addressing the question of what it is worth to save those lives, i.e. to reduce those deaths, via that program, an important question is, Worth to whom? Who cares, and how much?

            Outline the way you would go about identifying the relevant interested or affected parties–individuals or governments–and how you might investigate the extent of their interest, especially the money value of their interest.

5. Crime Rates and Police Coverage

      It has been observed that in some cities the incidence of armed robbery and illegal violence is kept at a low level by an effective response of the police, who, having a low level of violence to contend with, provide a deterrent likelihood of quick arrival. In other cities of similar social and geographic character the incidence of violence is so high that the police cannot answer calls promptly or investigate each incident. There is often no convincing explanation for the much greater prevalence of violent crime in the one case compared with the other-except, of course, the difference in effectiveness of police coverage. Yet examination shows that the numbers of police do not differ widely in the two situations.

      On the analogy of the “tipping” model, develop an analysis that could explain this phenomenon.

6. Fire Protection

      Fire protection is nearly everywhere a city-government or town-government responsibility in the United States. It is (a) financed out of taxes and (b) provided by town employees using town equipment. By contrast, fire insurance is a private activity, homeowners buying it from private companies. Evidently there is a belief that the market cannot meet the need for fire protection: either people won’t subscribe or private firms won’t offer it. Or maybe there is just a custom that nobody questions.

1. 1. 1. What are some plausible reasons why fire protection might not be left to “the market”?
      2. Do you think some of these reasons are decisive, and fire protection needs to be organized as it is?
      3. Can you think of any alternative approaches to fire protection that might be worth experimenting with?

7. Smoking in Class

      In “The Economic Common Sense of Pollution” Ruff discusses the idea of charging people for their polluting activity, rather than simply prohibiting or permitting it. A familiar form of pollution is smoking in enclosed places where non-smokers are present.

      Suppose a special section of some class meets regularly in the evening. Some members of the class want to smoke; others complain of poor ventilation and object to any smoking. Somebody proposes that smokers might pay for the privilege of smoking.

      It is known that you have given some thought to the “pricing” of pollution, and you are asked whether it makes sense to charge for smoking and, if so, how to determine how much to charge and what to do with the proceeds.

Discuss it.

8. Saturday Sections

      A course instructor generously offered to meet Saturday morning with interested members of the class to go over the week’s material, answer questions, etc.. Attendance was meager for a few weeks but picked up as the semester wore on, and by late in the term most of the class was showing up Saturday morning. The following year, the instructor made the same arrangement; attendance was meager for a few weeks and then fell off until only a few loyal participants were left. Even they were gone by the end of the semester.

      The instructor is perplexed at how one class was so eager while the other lost even the little interest it had. He is looking over the enrollments for the two years to see whether he can distinguish anything about the composition of the classes that would explain the difference. He wonders what to expect if he tried it once more. He’ll be happy for any advice you can give him.

9. Apartment House Heating

      It is expected that many apartment buildings, especially among the lower-rent apartments, may again be unable to obtain as much heating fuel this winter as in past years, It is characteristic of apartments, especially the cheaper ones, that there is no metering of the heat consumed by individual tenants. If nobody takes steps to reduce heat consumption the building may run out of fuel for several days at a time, with frozen pipes and frozen people. If somebody takes steps to reduce the heat absorbed by his own apartment, usually nobody will notice–not his neighbors, not the landlord.

      Nobody has a good idea of how much reduction in heat consumption by individual apartments will be needed, as measured by anything the tenant can measure–e.g., room temperature, radiator temperature, etc. Some apartments require more heat than others to maintain the same temperature. (Corner apartments require more heat.) Some families have elderly people, babies, sick people. Some apartments are vacant most of the day, some are occupied all day.

      Nothing in any tenant’s lease makes any provision for heat control, rationing, rebates or extra charges.

      You are asked by some concerned tenants to help work out a reasonable way to minimize the risk of acute discomfort and danger due to exhaustion of fuel.

      Analyze the problem. State what data you would need in order to proceed. Outline at least one solution you would pro-pose, or several alternatives. And indicate how you might persuade tenants and landlord to accept your proposal in the event they fail to appreciate its merits or exaggerate its defects.

10. Deposit on Cans and Bottles

      Legislation has been introduced to require a deposit on every beer or soft drink can or bottle, the deposit returnable upon return of the container. There are interests in favor and interests opposed. There is rarely discussion of how large the deposit should be–five or ten cents seems to be what people expect. The stated purposes are primarily to reduce littering and secondarily to conserve materials and energy by re-using containers or recycling materials.

      What would you want to take into account–and what facts would you want to investigate–if it were up to you to choose and justify the amount (or amounts, if variable) that the deposit should be, if there were to be a deposit.

11. Smoking in Class: Another Room

      Consider a classroom of students among whom some like to smoke, some find it disagreeable, and some don’t care. There is dispute whether smoking should be prohibited. (It has traditionally been permitted but complaints have been frequent.) An alternative room is available, one with an air conditioning system that will mitigate the smoke nuisance for both smokers and non-smokers.

      The air-conditioned room costs extra, and the extra cost will have to be borne by the students.

1. 1. 1. How would you determine whether the air-conditioned room is worth the cost? Be explicit about your criterion of “worth.”
      2. How would you propose the extra cost be paid–by which students and in what proportions?

12. Library Air Conditioning

      A group of citizens has tried to get the town to spend $20,000 to air condition the library. They argue that the building is hot and stuffy in summer and the utilization of the library and the quality of the experience are diminished. For two years the proposal has gone before the town’s governing body, and both times it has been defeated. The opposition argues that the tax rate is out of hand anyway and this is a frill that will benefit a few at the expense of everyone.

      The question will arise next year and the town leaders want to put this issue to rest. They have no axe to grind, just want the question settled. You have been requested to prepare an analysis and a recommendation.

1. 1. 1. How would you frame the issue for analysis?
      2. What data would you want to evaluate different choices?
      3. Are there sources of money other than town-wide tax support that you would consider?

13. State-University Tuition

      Radio station WBZ editorially has opposed the principle that a state university ought to charge residents a tuition of only one-fifth the usual tuition at comparable private universities, arguing that student loans and occasional scholarships coupled with regular tuition payments would be more justifiable.

      A recent court decision called into question the right of state universities to charge higher tuitions to nonresidents than to residents of the state.

      Evaluate the idea of low tuition for state residents at state universities, with attention to the following questions:

1. 1. 1. Why should tuition be low compared with other universities?
      2. Why should tuition be subsidized only at the state university and not at any university in the state?
      3. Why should tuition be low only for residents of the state?
      4. Why should tuition not be similarly subsidized for state residents who get their education at colleges outside the state?

      Be sure to discuss who benefits and who loses, what the effect may be on college attendance, and what the effect may be on attendance at the state university.

14. Nursery Schools

      Some of the most expensive private schools, from nursery schools to colleges, provide scholarships for a few children whose parents could not afford the tuition. The system is challenged as inappropriate charity by some tuition-paying parents, and defended by others as a way of sharing privileges that only a few can otherwise afford. Nursery schools are usually not endowed, so the costs of scholarships are borne by the parents who pay tuition for their own children.

      If you were asked to speak on this issue at a meeting of nursery school parents, on grounds that you have taken this course, what are the main points you would make to help the parents think about the issue?

15. Youth Fare

      The Civil Aeronautics Board gave notice that “youth fare” had to be terminated. (Youth fare was lower fares for young people, usually with some loss of priority to the youths taking advantage of it.) The argument was that youth fare discriminates against other passengers.

      Discuss the “discriminatory pricing” represented by the youth fare, indicating who is likely to gain and who to lose, with what effect on average fare, volume of travel, passenger convenience, and so forth.

      Identify any significant distributional implications of the particular groups or classes that appear to gain and to lose.

      What do you consider to be the chief socio-economic or other characteristic of “youth” that one ought to have in mind in considering the merits of youth fare?

16. Welfare and Work Incentives

      If a welfare program assures every eligible family a specified minimum income, providing the difference between actual earnings and that minimum, the incentive and the opportunity to work gainfully are said to be impaired by a “100 percent income tax.” But without some assured minimum many families will fall below any decent standard of living.

1. 1. 1. Explain the basic dilemma.
      2. Discuss proposed solutions.
      3. Evaluate the difficulty of finding an ideal solution to the problem.

17. Dining Hall Problem
    1. Evaluate these alternative ways to distribute food and to assess costs in a graduate school dining hall.
       1. At every mealtime there is a fixed menu. Everybody gets the same meal and the same quantities. Total cost is divided equally among all those eligible to use the dining hall.
       2. As in No. 1 there is a fixed menu, but everybody eats as much as he pleases. The total amount of food is the same as in No. 1; and if some take more than their share and none take less, the last to arrive will face shortages. The cost is assessed in equal shares.
       3. Substantial variety is offered; everybody helps himself to whatever he likes, as much as he likes; adequate supplies are made available. Everybody is assessed an equal share of the total cost.
       4. A cheap meal is offered free; a variety of more expensive meals can be purchased a la carte. The cost, less the proceeds, is divided among the members.
       5. Same as No. 1, but the menu is fixed for each day of the week and known to all. People are charged only for the meals they eat, and may eat elsewhere. All meals count the same in everybody’s monthly bill.
    2. What difference will it make—
       1. if individual dishes (and beverages, rolls, etc.) are in such form that they can be shared, given away, or traded among diners;
       2. if every member is issued a specified number of transferable guest passes each month;
       3. if every member has a pass, good for each mealtime, and anyone holding the pass will be admitted without further identification.

18. University Parking

      A university possesses some parking area and finds that the number of employees who need parking has grown to twice the number of spaces available. Alternative public parking off campus is expensive. Numerous proposals have been made about what to do:

1. 1. 1. Assign non-transferable parking stickers to half the employees. Do this (a) by seniority, (b) by lottery, or (c) any other selection system you propose.
      2. Same as a but let the stickers be sold, traded, or given away by the recipients.
      3. Assign spaces to those who live farthest away where there is no public transportation.
      4. Convert university parking space into public parking lots, charging admission to the general public like any other commercial parking lot.
      5. Give all employees who drive to work one ticket and “sell” parking to university employees at a “price” of two tickets per space, letting everybody choose whether to sell his ticket to another employee or to buy somebody’s ticket and acquire a parking space.

      Make a recommendation and support it with the best argument you can construct. You need not recommend one of the above alternatives, but you must indicate why the scheme you recommend is superior.

19. Vouchers, Goods- (services) -in-Kind, or Cash

            What are the central issues raised by the choice between giving people (1) such things as food stamps, school vouchers, trash collection vouchers, as against giving them (2) goods in kind, e.g., free lunches, or free schooling, or free trash collection, as against giving them (3) cash. Discuss the principles that should govern the choice, and illustrate your answer by three examples that highlight significant differences. (If you like, use food, schooling, and trash collection. If not, use any three that help you make your points.)

20. Gasoline Mileage

      A major reason for U.S. dependence on foreign oil is that American automobiles get poor gas mileage. Three alternative remedies might be:

1. 1. 1. Prohibit production of cars that get less than some specified miles per gallon;
      2. Put a tax on new cars that is related to gas consumption, high on cars with poor mileage while fuel-efficient cars pay a small tax or no tax or even receive a rebate;
      3. Tax gasoline, not automobiles.

            Evaluate the three proposals in terms of what you have learned in this course.

21. Elasticity of Response

      Some policies are motivated by an interest in changing the way people behave; others are intended to compensate people for the results of the marketplace or for extraordinary misfortune. Few policy measures are without some induced change in behavior, whether the change is intended or not.

      Discuss the “elasticity of response” as a factor in policy evaluation. By “elasticity of response” is meant the degree to which behavior is affected by the policy.

      Discuss the kinds of policies for which a high elasticity will frustrate the policy or make it too expensive, and the kinds that in contrast are justified by a high elasticity.

      Give examples of both kinds. Your examples may be from income taxation, medical insurance, welfare programs, resource conservation, pollution abatement, or any field that interests you.

22. Property-Tax Exemption for Veterans

      Many states provide benefits to veterans–mortgage guarantees for purchase of homes, civil-service preferences, certain kinds of tax exemption.

      One proposal is that, as a benefit pertinent to young veterans raising families, every veteran should receive some stipulated exemption from property taxes within the state, possibly a specified amount or percentage to be subtracted from the assessed valuation on his property before the tax rate is applied.

      (The mechanisms for this may be complex, since states might have to reimburse towns, which impose most of the property taxes, but suppose that the internal finances can be worked out.)

      Evaluate the proposal.

      Identify the purposes it may serve.

      Identify any important distinctions and details that would make a major difference in the proposal.

      Assuming that some state resources were to be made available for returning veterans, identify one or two alternative proposals that, at about the same aggregate cost, might come closer to meeting the criteria by which you judge such a program.

23. Incentive Effects of Private Insurance

      An important principle in the analysis of social insurance programs is that incentive effects, many of which will be perverse but some may be beneficial, should be watched out for. Briefly discuss the incentive effects you might want to watch out for–and how you would evaluate them–in any policy designed to encourage, to discourage, or to rely on, the following kinds of private insurance that might be available in the market.

      Assume that in each case the insurance pays compensation in cash.

      Give some thought to who does the insuring–e.g., the customer’s own heating-oil company in (c).

1. 1. 1. Insurance against loss due to burglary.
      2. Insurance against being convicted of burglary.
      3. Insurance against running out of heating fuel.
      4. Insurance against receiving a grade lower than some specified grade in a graduate course.
      5. Insurance against running out of gasoline during a gasoline shortage (for any reason).
      6. Insurance against losing money in the resale of a house in a “declining neighborhood.”
      7. Insurance against auto collision during hazardous driving conditions.
      8. Insurance against the cost of emergency help in the event of dead batteries, flat tires, or being trapped by snow in one’s driveway.
      9. Insurance against all medical costs incurred during a hospital stay.

24. Overbooked Airline

      An airline oversubscribes a flight and by scheduled flight time has 140 passengers with valid reservations and only 120 seats on the plane, which will depart two hours late because of late arrival, so there are nearly two hours in which to decide what to do. There are no established rules to cover the situation. The airline has no record of the dates on which people made their reservations. The passengers have been informed of the situation but not told what the airline proposes to do. You are to advise the airline right now.

      Pick one among the following procedures, or make up a procedure of your own that is not on this list, and defend it by comparing it with what you think are the most serious or attractive alternative procedures listed.

1. 1. 1. Issue boarding passes randomly by drawing names out of a hat, making clear to the passengers that the names have been shuffled to guarantee randomness.
      2. Announce that the flight will be delayed until 20 people have either cancelled their reservations or made other arrangements, boarding the 120 still remaining.
      3. Have everyone hand sealed bids for places on the plane. The highest 120 bids are selected and the money collected. The amount collected is distributed among some or all of the 140 passengers in any manner you choose–equal shares to everyone, equally to those who did not bid high enough to get on, or whatever seems appropriate to you.
      4. Announce that spaces will be allotted according to the dates when reservations were made, the earliest 120 reservations to be given seats on this flight, and call out 120 names as though the airline actually had those dates available.
      5. Simultaneously raise the price of going tonight and lower the price for going tomorrow until you find a pair of prices at which:
         1. exactly 120 wish to go tonight, and
         2. the airline breaks even, that is the discount to the 20 who go tomorrow equals, in total, the surcharge on the 120 who go tonight.
      6. Issue 120 boarding passes by random selection—making clear the passengers understand that the names have been shuffled and the selection is random–but announce that the boarding passes are transferable, passengers may transact any business they wish with their boarding passes–e.g., a couple travelling together that obtains only one pass may attempt to buy a second pass or to sell the one they have and go together later.

Additionally, answer the following:

1. 1. 1. Which among these procedures would be more acceptable if everybody knew in advance what the standard procedure would be in this situation?
      2. Which among these procedures would be less attractive if everybody knew in advance what the procedure would be.
      3. Which procedures are most likely, if they are the acknowledged general rule for these situations, to induce the airline to book the right number of people for each flight? (By the way, what is the right number for each flight that the airline ought to book?)

25. Environment in the USA and the USSR

      In his chapter on Environmental Disruption, Marshall Goldman compares environmental destruction in the Soviet Union with that in the United States, finding not only that there is such a problem in both countries but that the specific occurrences look much alike. It is often supposed that in the United States businesses will disregard the environmental damage which they do because they are in pursuit of profit; it is often supposed that no such motives would obtain in a socialist economy. It may come as a surprise that in an economic system without the profit motive there is similar disregard for the environment.

      How does Goldman explain the parallelism in the way the environment fares at the hands of these two dissimilar social and economic systems? How persuasive do you find his analysis?

26. Insurance and “Moral Hazard”

      It is often argued that insurance may be self-defeating because of “moral hazard,” the tendency for people, once insured against some risk, to skimp precautions against the risk. People whose homes are insured against fire take fewer precautions against fire than if they had no insurance; people insured against theft may decorate their homes with more valuable objects than if they were uninsured.

      For the contrary it is also argued that insurance frees people from the necessity to go to expensive lengths to guard against fire or theft, and that what is sometimes derrogated as “moral hazard’ is merely the efficient substitution of insurance for the more expensive alternative, protection. Better to pay $1 per $1,000 of home value per year to cover the cost of a house or two destroyed by fire than to spend $3 per $1,000 of value in protection, especially when the protection is imperfect.

      Evidently these two views of insurance conflict. Presumably they conflict whether the insurance is privately purchased on the market or publicly provided by government. If you were asked which of the two views is the correct one, or are both views in the wrong, what answer would you give?

27. Common Property

In his article on a “Common-Property Resource: The Fishery,” Scott Gordon (in the book edited by Dorfman and Dorfman) likens the problem of the fishery to that of hunting and trapping, the drilling for petroleum from a common underground pool, and the use of common pasture for private animals in the medieval “common.”

State succinctly the nature of the general problem of common-property resources of the kind he investigates.

Give an example or two of your own.

Indicate some of the ways that these different variants of the same general problem may be solved.

28. The City

Wilbur Thompson, in the article contained in Hochman’s, The Urban Economy, refers to “The City as a Distorted Price System.

Can you explain what he means by this characterization?

Can you give a few examples?

What does he say (or imply) ought to be done about it?

Do you have an opinion on that?

29. Child Care

In her article on federal support for child care, in the Haveman and Margolis book, Alice Rivlin cites figures that “acceptable” day care for a pre-school or school-age child would cost around $2,000 per year. The figures were from 1968; with inflation it might be over $3,000 now. Among the arquments in favor of federal support for day care is the desirability of permitting comparatively poor mothers to work out of the house and augment their earnings.

Rivlin discusses the issue of extending federally financed day care to middle-income families (up to $12,000 per year at the time she wrote, equivalent to perhaps $16,000 now). If you do, she says, it’s expensive. If you don’t, you have the equivalent of a high “income tax” on poor women’s earnings.

Explain the dilemma.

Is it the same as the “welfare dilemma” discussed in connection with the negative-income tax?

How would the dilemma be affected if the women were given cash that they could spend on day care or on anything else they might prefer to spend it on?

Source:  Thomas C. Schelling, Economic Principles and Public Policy (Harvard, Spring 1981). Exam Questions from Earlier Years. Photocopy reproduced in Economics Reading Lists, Course Outlines, Exams, Puzzles & Problems compiled by Edward Tower. Vol. 12 (July 1981): Public Finance Exams, Puzzles & Problems, pp. 18-38.

Image Source: File photo from 1983 Harvard News Office. The Weatherhead Center for International Affairs at Harvard University. “In Memoriam: Thomas C. Schelling, 1921–2016”