Economic Analysis of Public Policy Problem Set-

1. An Op-Ed article by Martin Schmidt published in the New York Times on October 19th 2006 argued in favor of a tax on drive-through food orders as a method for reducing obesity. He suggests a 10% tax on the amount of drive-through food purchases. Instead of a percentage tax, consider a flat tax on each drive-through order. Do you think this proposal would reduce obesity? Why? Start your analysis by showing the impact of the tax on the quantity of drive through meals consumed. Also consider the spillovers this tax may have on other types of food consumption.

2. Budget Constraints

a. Assume that housing and food are the only goods available. A family's budget is $800 a month. Assume the price of food is equal to $4 and the price of housing is equal to $5. Draw the budget constraint for this family.

b. Draw the budget constraint if the family is given a TANF grant of $1200 a month and prices and other income are the same as in part A. There is no restriction on how TANF grants may be spent.

c. Draw the budget constraint if the family is given a housing voucher worth $1200 a month and prices and other income are the same as in part A. Housing vouchers may only be spent on housing.

d. Draw the budget constraint if the family is given public housing worth $1200 a month and prices and other income are the same as in part A. Assume public housing does not cost the family anything. Also assume that if a family lives in public housing, they cannot use their own money to increase the size of the public housing unit they are renting.

Hint: Even though public housing does not cost the family anything, your budget constraint must show the value of the public housing to the family. The reason is that the budge constraint shows all of the possible choices available to the family.

3. Optimal Choice

Assume Carolyn is given a bundle on her budget constraint where her MRSFC 2. Also assume the price of a unit of food equals $3 and the price of a unit of clothes equals $6. Should Carolyn buy more food or more clothes to maximize her utility? Why? Explain in detail.

4. Effect of Government Programs

Assume that the budget constraint shown is for $600 of income with a price of food equal to $2 and a price of clothes equal to $4. With an indifference curve and budget constraint as shown, will a TANF grant of $200 have the same effect on food consumption as $200 in food stamps? Why? Explain in words and graphically. Note that you must use the scale provided in the picture.

NEW YORK TIMES October 19, 2006

OP-ED CONTRIBUTOR

Supertax Me

By MARTIN B. SCHMIDT

Williamsburg, Va.

THE National Centre for Health Statistics estimates that 30 percent of American adults, some 60 million people, are obese. Thirty years ago that number was 15 percent. The trend is similar among children: according to the surgeon general, the percentage of obese youths has tripled, to nearly 15 percent, since the 1960's.

Obviously, we face a crisis of obesity and its concomitant health problems. In the spirit of "every little thing can help," I have a modest suggestion to reverse the trend: enact a tax on drive-through food orders.

Now there are many reasons for the rise in obesity, but to an economist a big factor is that food has become "too cheap." I do not mean in the typical sense of dollars and cents. (The fact that that the average family pays only about 20 percent of its income on food today, down from 30 percent in the 1960's, is a positive change.)

Rather, I mean that the procurement of food has become too "cheap" in terms of time and effort. Advances in technology have allowed us to increase the food supply while reducing the amount of workers needed to produce it. In 1830, roughly 300 labor-hors were required to produce 100 bushels of wheat. Today, that number of bushels can be produced with fewer than three labor-hours.

At the same time, of course, workers have moved into less physically taxing jobs, typically spending most of the day sitting in a chair rather than tilling the soil. Some estimates hold that 50 percent of Americans do not exercise regularly.

And in terms of breakfast, lunch and dinner, one hardly has to do anything but drive a car and chew. The Centers for Disease Control estimates that 40 percent of the average family's food budget is spent on fast food. Furthermore, a recent study from the market survey firm Claritas estimates that 78 percent of all fast-food diners use the drive-through. Heck, even many of the more expensive, family-style restaurant chains now have special parking spaces where video cameras are on the lookout so workers can bring your order to you in the front seat.

If the low "cost" of eating fast food is adding to the obesity problem, the solution involves increasing the cost, even in a nominal way. How do we give individuals the incentive to pay a little more - increased physical exertion, lack of convenience - to get their food? This is where a drive-through tax comes in.

We could tax the drive-through purchases at, say, 10 percent, while leaving the purchase of walk-in meals alone. At the very least, it may entice some to park and walk rather than waiting in the car.

Now, this may seem an invasion of personal choice or another step toward a nanny state. Maybe. But there are other arguments to be made. We tax cigarettes in part because of their health cost. Similarly, the individual's decision to lead a sedentary lifestyle will end up costing taxpayers. In 2001, the surgeon general issued a report nothing that obesity and its complications cost the nation $117 billion annually, much of it through Medicare and Medicaid.

Imposing a drive-through tax would be one way of recouping future taxpayer outlays - perhaps revenues could go directly to government health programs. And who knows, it could help the environment, too: with one move, we could fight obesity and reduce emissions from all those cars idling in the line at Burger King.

Martin B. Schmidt is a professor of economics at the College of William & Mary.