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 Mexico.

In an election debate, the following statements are heard: (a) "the VAT increase on movie tickets reduced audience numbers", (b) "VAT on culture should be lowered", (c) "subsidies for Mexican 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?

The state subsidises cinema tickets for young people: it pays $\$100$ 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 $\$3,000$ 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 $\$1$ to $\$3.50$ 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 pesos, 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.