Exercises: Positive economics, normative economics, and state intervention

Distinguish between positive economics and normative economics, and classify these statements: "youth unemployment exceeds $25\ \%$", "the government should raise the minimum wage", "raising taxes on tobacco reduces its consumption", and "more public housing must be built".

Explain three reasons why the state intervenes in the economy (market failures, income redistribution, and economic stabilization) with an example of each.

Name three instruments of economic intervention by the state and give a real-life example of each applied in Ireland.

Classify these statements as positive or normative and justify each decision: "the CPI rose by $3\ \%$ last year", "the ECB should cut rates now", "public debt exceeds $100\ \%$ of GDP" and "healthcare should be free and universal".

Explain what income redistribution is and how the State carries it out. Illustrate it with the case of study grants funded with taxes: who provides the money, who receives it and with what aim?

What is a natural monopoly (an activity where duplicating the network would be wasteful, such as water or railways)? Explain why the State usually regulates its prices or runs it directly, instead of leaving it to competition.

What is an economic stabilisation policy? Give an example of how the State acts when a crisis arrives (maintaining benefits, public works) and explain what it tries to avoid.

Distinguish between the objective and the instrument of a public policy. In the sentence "to reduce youth unemployment, we will subsidise the hiring of under-$25$s", state which is the objective and which is the instrument, and give another alternative instrument for the same objective.

In an election debate, the following statements are heard: (a) "the VAT increase on cinema tickets reduced audience numbers", (b) "VAT on culture should be lowered", (c) "subsidies for European cinema maintain jobs", (d) "more should be spent on trains".

1. a) Classify each statement as positive or normative and justify your classification.
2. b) Explain why it is important to separate both types of statements in public debate.

A city sets a maximum price for apartment rentals to protect tenants.

1. a) What is the objective of the intervention and what type of instrument does it use?
2. b) Analyse two possible unintended side effects and explain how you would evaluate whether the measure worked.

The figure summarizes the logic of public intervention: objectives, instruments, and evaluation indicators.

1. a) Apply it to the case of "reducing youth unemployment": formulate an objective, two instruments, and an indicator.
2. b) Why is it important to define the indicator before applying the measure?

In a debate, these statements are heard: "the minimum wage rise lifted low wages by $5\ \%$", "it was the right call", "it should be raised again next year" and "youth unemployment did not change".

1. a) Separate the positive statements from the normative ones and justify the classification.
2. b) For each positive statement, state what data would allow you to check it and where you would look for them.

Shared e-scooters clutter the pavements, cause pedestrians to fall and their batteries generate waste.

1. a) What market failures or externalities justify the council regulating this service?
2. b) Design the regulation (parking zones, compulsory insurance, a fleet limit) and evaluate its costs and benefits qualitatively.

The Government subsidises the purchase of electric bicycles with $\text{€}\ 400$.

1. a) Formulate the policy's objective in a measurable way.
2. b) Design its evaluation: what data you would collect before and after, and what group you would compare the buyers with.
3. c) Point out two unintended effects you would watch for (rising bike prices, aid going to people who were going to buy one anyway) and how you would detect them.

A country pays farmers a subsidy per cultivated hectare. Over the years, the large estates accumulate almost all the aid and the small farmers disappear.

1. a) What has gone wrong in the design? Relate it to the concept of government failure.
2. b) Redesign the aid (caps per farm, social or environmental criteria) and explain what objective each change pursues.

Economists usually agree that "a tariff makes imported goods dearer", but disagree on whether it should be imposed.

1. a) Explain, with the case of steel, why the first statement is verifiable and the second is not: what value judgements enter the decision (domestic jobs versus prices, the present versus the future)?
2. b) Reason what separating facts from judgements contributes to public debate.

The state subsidises cinema tickets for young people: it pays $\text{€}\ 5$ per ticket and cinemas fill up with teenagers.

1. a) Analyse the measure: objective, instrument, and direct and indirect effects (cinemas, production companies, alternative leisure).
2. b) How would you evaluate, after one year, whether the policy is worth continuing? Design that evaluation.

To reduce youth unemployment, a regional government approves the "First Job Voucher" program: it grants a non-repayable subsidy of $\text{€}\ 3,000$ to any company that signs a $6$-month full-time contract with an unemployed person under $25$ years of age. One year after its implementation, the labor inspection finds that $85\ \%$ of beneficiary companies terminate the contract exactly upon completing the sixth month and immediately hire another young person to collect a new grant, while the youth unemployment rate has barely changed (it went from $29.2\ \%$ to $28.8\ \%$).

1. a) Explain in detail the mechanism of perverse incentives (substitution effects and opportunistic turnover) that has turned this policy into a government failure.
2. b) Predict the consequences this design will have on job stability, workers' human capital accumulation, and the public budget if it is maintained for two more years.
3. c) Redesign the subsidy: propose two changes to its conditions or to the payment timeline structure to align business incentives with the actual goal of creating permanent, high-quality employment.

Two economic advisors debate the proposal to raise the tourist tax from $\text{€}\ 1$ to $\text{€}\ 3.50$ per overnight stay in a city:

• Advisor A: "The price increase will reduce hotel stays by $4.2\ \%$ and destroy $800$ jobs in the tourism sector. It is, therefore, a terrible policy that harms the general well-being of the city."

• Advisor B: "Since demand is inelastic, municipal revenues will increase by $12$ million euros, which will allow funding neighborhood cleaning and public housing. Therefore, it is an unquestionable measure of social justice."

1. a) Point out which parts of each statement belong to positive economics and explain whether the quantitative predictions of both advisors can be technically true at the same time.
2. b) Identify the normative value judgment introduced by each advisor to jump from empirical data to their final conclusion ("terrible policy" versus "unquestionable measure"). Why can positive economic science not resolve on its own which of the two is right?
3. c) Design an alternative proposal for the city council that clearly states which normative criterion you prioritize and what three specific positive indicators you would use to assess whether the measure fulfills its purpose.

A county council creates an annual charge of $€500$ for flats that have been empty for more than two years, with the aim of bringing them onto the rental market.

1. a) Analyse the policy: objective, instrument and incentive mechanism (what does it expect owners to do?).
2. b) Anticipate two unintended effects (transferring ownership to companies, flats formally declared "occupied", little revenue) and explain each one.
3. c) Design the two-year evaluation: indicators, data needed and what you would compare the county with.

A city council facing debt problems debates privatizing two services through concessions to private companies:

1. The management of the municipal sports complex and its cafeteria ($4$-year contract).

2. The city's comprehensive drinking water distribution and sanitation network ($25$-year contract).

The Finance Councilor states: "In both cases we will save money, and market competition will guarantee lower prices and better service."

1. a) Rebut the councilor's argument by distinguishing the microeconomic characteristics of each service. Use the concepts of natural monopoly, fixed costs, and barriers to entry to predict why competition will work very differently in each case.
2. b) Explain what government failures (supervision problems due to information asymmetry and risk of regulatory capture) are likely to arise in the water network concession over the $25$ years.
3. c) Design three essential contractual clauses that the city council should impose on the water concessionaire company to prevent privatization from harming the most vulnerable users and to ensure the maintenance of infrastructure.

The National Markets Commission approves a regulation introducing a fixed charge on electricity bills to compensate gas-fired power plants for their "availability", increasing household bills by $8.5\ \%$. An independent university report shows that large installed overcapacity already existed and that the charge was unnecessary. Months later, it is made public that two of the regulator's board members had been executives at major power companies and that the agency's president has just been hired as a board director at one of them with a salary of $\text{€}\ 250,000$ per year.

1. a) Analyze the situation by applying the theory of regulatory capture: explain the conflict of incentives (principal-agent problem) generated among citizens, the regulatory agency, and the power companies.
2. b) Predict the effects of this type of government failure on the efficient allocation of resources (consumer surplus versus producer surplus) and on the credibility of the institutional framework.
3. c) Critically evaluate two institutional reforms to mitigate this failure: 1) establishing a $5$-year cooling-off period ("revolving doors") with exclusive dedication; 2) subjecting tariff regulations to binding reports from independent expert committees with no industry ties. Identify one advantage and one practical limitation of each.

An SME calculates that it spends $60$ hours a year on administrative paperwork: licences, certificates, tax returns.

1. a) How would you quantify the cost of that bureaucracy in euros (the owner's hours, the agency's fees, delays)? Make a reasoned estimate with your own assumptions.
2. b) Propose two simplification measures (a one-stop shop, positive administrative silence) and analyse what control risk is lost with each one.
3. c) Where would you strike the balance between simplifying and controlling? Justify your answer.

Two regions apply different employment policies: one subsidises hiring and the other funds training. After three years, the second has less unemployment.

1. a) Can you conclude that training works better? Explain what starting differences between the regions could account for the result (sector, age, the economic cycle).
2. b) Design how you would make the comparison "almost like an experiment" (choosing similar areas, measuring before and after, comparing the evolution) and explain why that methodology matters for deciding policies with evidence.

Unit challenge. Imagine that you are part of the government's advisory committee on youth access to housing. Your mission is to write a brief opinion analyzing whether the State should intervene and in what way.

1. Real data (positive economics): Go to the CSO website (cso.ie) and locate the youth unemployment rate or the annual change in the rental CPI (for example, $3.8\%$). Objectively describe the economic situation based solely on observable and verifiable facts.

2. Ethical judgment (normative economics): Draft two arguments containing value judgments about what the public sector should do in response to that reality, clearly distinguishing the data from your criteria of distributive justice.

3. Intervention proposal: Choose an economic policy instrument (rent caps, direct subsidies for young people, or public housing construction). Justify which market failure or equity issue it seeks to correct and assess a potential unintended or side effect on supply.

Submit a one-page executive report with your reasoned proposal.

Evaluation criteria:

• Rigorous distinction between positive statements (CSO data) and normative ones.

• Correct theoretical justification of the role of the State and the associated market failure.

• Critical ability to anticipate side effects and incentives of the chosen measure.