Public Provision of Goods and Services


Please provide answers in ONE Word file, starting a NEW PAGE for each question. Also, for question 2, you will construct a table in Excel and submit ONE Excel file. (Put all your text answers in the single Word file; the Excel file will be just for the table.)

You need not include the questions along with your answers. That is, you don’t need to start with this Word file and type in answers following each question; you can start a NEW Word file and just provide your answers. However, please be sure to label each answer with the appropriate question number, e.g. Question 1-(1).

Wherever you are providing answers in dollars, please be sure to clearly label whether your answer is in dollars, or in millions, billions, or trillions of dollars.

  1.  (3 points) Public Provision of Goods and Services

As of 2016, about one-quarter of all vehicle miles driven in the country use the Interstate Highway System. Interstate highways and their rights of way are owned by the state in which they were built, but the federal government pays roughly one half of the construction costs. About 70 percent of the overall construction and maintenance costs are paid for by fuel taxes collected by the federal, state, and local governments.

 (1) What are the reasons for the governmental as opposed to private provision of interstate highways?

(2) What is the rationale for using fuel taxes as opposed to general revenue to fund highways?

(3) Since the states own the highways, what are the justifications for the division of responsibilities that the federal government pays half of the construction costs?

Be sure to apply the economic theories we discussed in class. Limit your answers to no more than one single-spaced page.

  1. (4 points) Discretionary Spending Baseline Analysis

Suppose that the Congress is considering the creation of a new education grant program aimed at addressing learning disability issues at the state and local level. The program would be funded through annual appropriations, with the money transferred to states through a population-based formula by the Department of Education. The proposal is to appropriate $650 million for fiscal year 2021.

Your boss on the Senate Budget Committee has asked you to create a hypothetical 10-year baseline projection for the program, covering estimated costs for fiscal years 2021 through 2030. (Note: Since this is a brand-new program and 2021 will be the first year of appropriation, there are no “outlay priors” to worry about.)

There is no history to rely on since this will be a brand-new program. However, the proposed grant program seems similar to a few other education programs that you are familiar with, so you think you can use historical spending patterns for those similar programs to help create the baseline projection. You have identified historical average spendout rates to use for estimating outlays from new funding for the grants:

  • 24 percent in the first year,
  • 71 percent in the second year,
  • 4 percent in the third year, and
  • 1 percent remaining unspent (and eventually lapsing)

To inflate appropriations, assume that the baseline will reflect anticipated inflation of 2% per year.

(1)               Create a “waterfall table” for fiscal years of 2021 through 2030 using the above information. Create your spreadsheet table in an Excel worksheet that clearly shows all your work for each year, including showing the formulas—in other words, don’t create a table with just the end-product numbers.

(2)               How much appropriation would be required in total under the 10-year baseline for the grants program? That is, what is the 10-year total of baseline budget authority? (Respond in your Word document.)

(3)               What are the first-year (2021) outlays and the subtotal of the first three years (2021-2023) outlays? (Respond in your Word document.)

  1. (3 points) CBO Cost Estimate

On April 22, 2019, CBO published a cost estimate for House Bill 582, Raise the Wage Act. You can obtain a copy of the report here. Read the report and answer the following questions.

(1)   In your own word, why does raising the federal minimum wage DIRECTLY affect the federal budget?

(2)   Would the proposed policy have an impact on mandatory spending, and why? If yes, by how much does it change the projected federal deficit associated with mandatory spending over the 2020-2029 period?

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