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 government 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 Spain.

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

Explain what income redistribution is and how the government carries it out. Illustrate it with the case of student 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 railroads)? Explain why the government usually regulates its prices or runs it directly, instead of leaving it to competition.

What is an economic stabilization policy? Give an example of how the government 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 subsidize 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 sales tax increase on movie tickets reduced audience numbers", (b) "sales tax on culture should be lowered", (c) "subsidies for European film 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) Analyze 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 increase raised 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 sidewalks, cause pedestrians to fall, and their batteries generate waste.

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

The federal government subsidizes the purchase of electric bicycles with $\$400$.

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.

Economists usually agree that "a tariff makes imported goods more expensive", 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 judgments enter the decision (domestic jobs versus prices, the present versus the future)?
2. b) Reason what separating facts from judgments contributes to public debate.

The state subsidizes movie theater tickets for young people: it pays $\$5$ per ticket and movie theaters fill up with teenagers.

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

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, city revenues will increase by $12$ million dollars, 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 state creates an annual charge of $\$500$ for apartments that have been empty for more than two years, with the aim of bringing them onto the rental market.

1. a) Analyze the policy: objective, instrument and incentive mechanism (what does it expect owners to do?).
2. b) Anticipate two unintended effects (transferring ownership to companies, apartments 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 state with.

A small business calculates that it spends $60$ hours a year on administrative paperwork: licenses, certificates, tax returns.

1. a) How would you quantify the cost of that bureaucracy in dollars (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, automatic approval if the agency does not respond by a deadline) and analyze what control risk is lost with each one.
3. c) Where would you strike the balance between simplifying and controlling? Justify your answer.

Two states apply different employment policies: one subsidizes 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 states 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 government should intervene and in what way.

1. Real data (positive economics): Go to the Bureau of Labor Statistics website (bls.gov) and locate the youth unemployment rate or the annual change in the CPI for rent (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 control, 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 (BLS data) and normative ones.

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

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