Exam 4: Part A: Market Failures: Public Goods and Externalities

What are the basic differences between a public good and a private good?

Assume the atmosphere of an urban area is able to reabsorb 8,000 tonnes of pollutants per year.The schedule below shows the price polluters would be willing to pay for the right to dispose of 1 tonne of pollutants per year and the total quantity of pollutants they would wish to dispose of at each price. (a) If there were no emission fee, how many tonnes of pollutants would there be and how much greater would this amount be than the capacity for re-absorption? (b) What pollution fee should the urban authorities charge to solve the problem? (c) What would happen in this market for pollution rights if quantity demanded increased by 1,000 tonnes at each price?

What is producer surplus?

How could you use the Coase theorem to predict what would happen when smoke from a factory created dirty air and slightly acid rain for all the residents in the area in a one-kilometre radius of the plant?

In your own words, describe what free-riding means.

What is consumer surplus?

Assume the atmosphere of an urban area is able to reabsorb 4,000 tonnes of pollutants per year.The schedule below shows the price polluters would be willing to pay for the right to dispose of 1 tonne of pollutants per year and the total quantity of pollutants they would wish to dispose of at each price. (a) If there were no emission fee, how many tonnes of pollutants would there be and how much greater would this amount be than the capacity for re-absorption? (b) What pollution fee should the urban authorities charge to solve the problem? (c) What would happen in this market for pollution rights if quantity demanded increased by 1,000 tonnes at each price?

What is the economic rationale for liability rules and lawsuits? What are the limitations with this approach?

The following table shows marginal costs and benefits of the optimal quantity of pollution abatement that will occur at a local factory. (a) What is the optimal level of pollution abatement? Why? (b) If the marginal benefit of pollution abatement were to increase by $30,000 at each level because of the factory's desire to improve its image and environment, what would the optimal level be? Why? (c) What might cause the optimal level of pollution abatement to be 400 tonnes?

What resource problem is created by negative externalities and what methods are suggested for dealing with this problem?

The demand and supply in a market are represented by the equations P = 50 - .2QD and P = 20 + .3QS.A spillover cost in production equal to $2 per unit exists in this market.(a) What are the equilibrium price and quantity? (b) What are the optimal price and quantity? (c) How large must a specific tax in this market be to eliminate the market failure? Is the tax equal to the difference between the equilibrium price and the optimal price?

Imagine that a provincial government is considering the construction of a new office building to consolidate its operations.Its estimate of the total costs and the total benefits of building a 4- 6-, 8-, or 10-story building is shown in the table below.(All figures are in millions of dollars.) (a) Compute the marginal cost and the marginal benefit of the 4-, 6-, 8-, and 10-story buildings.(b) Should the state build a new office building? If so, what size building and what will be the total benefit, total cost, and net benefit to society?

The next three questions refer to the below supply and demand graph for a public good. (a) What does point c represent? (b) What does the line segment ef at output Q3 represent? (c) At what output level is there an underallocation of resources to the production of this public good?

Supply in a market is represented by the equation, P = 5 + .1QS.Suppose the market price is $30.(a) How many units do sellers wish to provide in this market? (b) What is the minimum amount that sellers are willing to accept for this quantity of output? (c) What is the actual amount that sellers receive for providing for this quantity of output? (d) What is the producer surplus that sellers obtain for providing this quantity of output?

What is the meaning of Market Failures and how do the Demand and Supply curves cause such failures?

Draw a market demand curve and indicate the following: (a) The market price; (b) The quantity demanded; (c) The maximum amount that buyers are willing to pay for the quantity demanded; (d) The actual amount that buyers must pay for the quantity demanded; (e) The consumer surplus from obtaining the quantity demanded.