- (5 points) The competitive market equilibrium price of
sanitation services in a small town with no government
supplied sanitation services is $2 per trash pickup. There
is a $1 marginal external benefit associated with each
trash pickup. The elasticity of supply of garbage pickups
is infinite in the long run implying a horizontal supply
curve. What has to be done to achieve the efficient output
of sanitation services.
A corrective subsidy must decrease the price paid by
consumers of sanitation services to $1 per pickup.
- (5 points) The current competitive market price of fish
is $3 per pound. A chemical producer emits effluent into a
lake used by a commercial fishing firm. Each ton of
chemical output causes a 20 pound reduction in the annual
catch of the fishing firm. Assuming that transactions cost
are zero, and the chemical firm has the legal right to dump
effluent in the lake. How much would the fishing firm be
willing to pay per ton of chemicals per year to induce the
chemical firm to stop the chemical output.
The fishing firm would be willing to pay up to $60 per ton
of chemicals per year to induce the chemical firm to reduce
chemical output.
- (4 points) State the condition for efficiency of the
allocation of a public good.
The condition is that the sum of the marginal benefits of all
consumers has to equal the marginal cost.
- (15 points) The demand for artichokes is x = 100-2p. The supply of artichokes good is x
= 5p. Assume that the marginal private cost equals the
marginal social cost, but due to the artichokes' magical
properties, the marginal private benefit is $5 lower than the
marginal social benefit.
- (5 points) Compute the market price and
quantity.
p=100/7
x=500/7
- (5 points) Compute the efficient quantity.
x=550/7
- (5 points) Calculate the tax or subsidy that
yields the efficient allocation.
A 5$ subsidy per unit of artichokes.
- (4 points) Suppose that open spaces such as parks are
public goods for the citizens that go and use them. Can you
think of a way of providing the public good that does not
require the government? Briefly explain how does it work.
One way to provide public parks without the intervention of
governments is through a club. What is key is that entry to
the park can be controlled. Hence a club can overcome the
local externality by controlling entry. Obviously, a private
company could also provide the park by charging an entry fee.
Indicate whether these statements are true or false
and why
- (4 points) If a negative externality exists for sales
of gasoline in a competitive market, more than the
efficient amount of gasoline will be sold per year.
True. The marginal social cost is higher than the
marginal private cost, therefore too much is produced.
- (4 points) In a Lindahl equilibrium, each consumer of a
pure public good consumes the same quantity and pays a
tax-share per unit of the good equal to his or her marginal
benefit.
True. A Lindahl equilibrium provides the efficient quantity
of the public good. Because it is a public good all consumers
have to consume the same quantity. Efficiency requires that
the sum of the marginal benefits for all consumers equal the
marginal cost. In addition, the consumers are happy with this
scheme because all of them equate marginal private benefit to
marginal private cost.
- (4 points) If all voters have single-peaked
preferences, a political equilibrium will not be possible
under majority rule.
False. Single peakedness over one issue is a condition that
guarantees that under majority rule the median voter's most
preferred outcome is the winner.