Deck 4: A: - Market Failures: Public Goods and Externalities

Question 1

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?

Answer 1

(a) 250 units; (b) $4375 [.5($30 - $5) * 250 + $5* 250]; (c) $7500 ($30*250); (d) $3125.

Question 2

Demand is represented by the equation, P = 200 - 2QD and supply by the equation P = 25 + 3QS.(a) Suppose this market produces 30 units of output.What price would this output be sold at if consumers we going to buy all goods? What is the marginal benefit to society of the 30^th unit? What is the marginal cost of the 30^th unit?
(b) What is consumer surplus if the market produces 30 units of output? What is producer surplus? What is the sum of consumer and producer surplus?
(c) What are the equilibrium price and quantity?
(d) What is consumer surplus at equilibrium? What is producer surplus? What is the sum of consumer and producer surplus?
(e) Is allocative efficiency achieved when the market produces 30 units of output? Explain in three different ways.

Answer 2

(a) The price is $140 [200 - 2(30)].The marginal benefit is $140.The marginal cost is $115 [25 + 3(30)].
(b) Consumer surplus is $900 [0.5($200 - $140) * 30].Producer surplus is $2100 [0.5($115 - $25) *30 + ($140 - $115) * 30].The sum of consumer and producer surplus is $3000.
(c) The equilibrium price and quantity are $130 and 35 units.
(d) Consumer surplus is $1225 [0.5($200 - $130) *35].Producer surplus is $1837.50 [0.5($130 - $25) * 35].The sum of consumer and producer surplus is $3062.50.
(e) Allocative efficiency is achieved when P = MC, when MB = MC, and when the sum of consumer and producer surplus is maximized.When 30 units of output are produced, P, which is $140, exceeds MC, which is $115.Also, MB, which is $140, exceeds MC, which is $115.Finally, the sum of consumer and producer surplus is $3000.However, this sum is not maximized.The sum can be as large as $3062.50.Therefore, on all three bases, allocative efficiency is not achieved at 30 units of output.There is an under allocation of resources to this industry.By shifting resources to this industry and increasing output to 35 units, allocative efficiency is achieved.

Question 3

What is producer surplus?

Answer 3

Producer surplus is the difference between what sellers receive for their product and the marginal cost of producing the product.

Question 4

Demand is represented by the equation, P = 20 - 0.2QD and supply by the equation P = 5 + 0.1QS.(a) Suppose this market produces 40 units of output.What price would this output be sold at? What is the marginal benefit to society of the 40th unit? What is the marginal cost of the 40th unit?
(b) What is consumer surplus if the market produces 40 units of output? What is producer surplus? What is the sum of consumer and producer surplus?
(c) What are the equilibrium price and quantity?
(d) What is consumer surplus at equilibrium? What is producer surplus? What is the sum of consumer and producer surplus?
(e) Is allocative efficiency achieved when the market produces 40 units of output? Explain in three different ways.

Question 5

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

Question 6

How is consumer surplus derived from a demand curve?

Question 7

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?

Question 8

Demand in a market is represented by the equation, P = 50 - QD.Suppose the market price is $30.(a) How many units do buyers wish to purchase in this market?
(b) What is the maximum amount that the buyers are willing to pay for this quantity of output?
(c) What is the actual amount that buyers have to pay for this quantity of output?
(d) What is the consumer surplus that buyers obtain from purchasing this quantity of output?

Question 9

Demand in a market is represented by the equation, P = 30 - .5QD.Suppose the market price is $18.(a) How many units do buyers wish to purchase in this market?
(b) What is the maximum amount that the buyers are willing to pay for this quantity of output?
(c) What is the actual amount that buyers have to pay for this quantity of output?
(d) What is the consumer surplus that buyers obtain from purchasing this quantity of output?

Question 10

How is producer surplus derived from a supply curve?

Question 11

Draw a market supply curve and indicate the following:
(a) The market price;
(b) The quantity supplied;
(c) The minimum amount that sellers are willing to accept for the quantity supplied;
(d) The actual amount that sellers receive for providing the quantity supplied;
(e) The producer surplus from providing the quantity supplied.

Question 12

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

Question 13

Explain the difference between a public and private good.Describe the rationale behind supply and demand analysis for public goods.

Question 14

What is consumer surplus?

Question 15

Supply in a market is represented by the equation, P = 20 + .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?

Question 16

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?

Question 17

How are producer surplus and economic profit related?

Question 18

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.

Question 19

How does the market demand curve for a public good differ from the market demand curve for a private good?

Question 20

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

Question 21

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?

Question 22

Describe how a market for externality rights would work in terms of supply and demand.

Question 23

Evaluate: "Pollution is undesirable.Therefore, all pollution should be banned."

Question 24

Draw a supply and demand graph on the below diagram that illustrates the market for pollution rights.Label the axes and curves.Then show what happens to price and quantity when the demand for pollution rights increases in the market.

Question 25

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

Question 26

Evaluate.Economy in government requires that government minimize its spending.

Question 27

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?

Question 28

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

Question 29

What are negative and positive externalities? How do they affect supply and demand curves?

Question 30

How do direct controls and specific taxes affect negative externalities? Briefly explain in terms of supply and demand.

Question 31

What are quasi-public goods and why does the government provide them?

Question 32

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

Question 33

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?

Question 34

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?

Question 35

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?

Question 36

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 $150,000 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 120 tonnes?