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The private marginal benefit for commodity X is given by 10 - X, where X is the
number of units consumed. The private marginal cost of producing X is given by 4 +
x and producing this commodity creates a negative externality, the marginal external
cost is constant at $2.
(a) How much X is produced without government intervention and at what price?
What are producer and consumer surplus in this case?
(b) What is the efficient level of production of X?
(c) Suggest a Pigouvian tax that would lead to the efficient level of production.
(d) What is the producer surplus in this market with the optimal Pigouvian tax?
(e) If some of the government revenue is spent compensating taxed producers for
their lost surplus, how much remains?
A. Choose a product with which you are familiar (i.e. Starbuck’s Frappuccinos) that will be
affected by the dynamics of the market economy.
B. Make up two different headlines for two graphs relating to factors causing a shift in demand,
then show how each will impact the product related to either surpluses or shortages and
ultimately a change in the equilibrium price. One must be an increase in demand, the other a
decrease in demand. You may only use each cause of a shift once!!! such as population.
C. Do the same for two factors causing a shift in supply. You must draw a separate graph for
each factor. You may only use each cause of a shift once!!! such as technology.
D. Type a paragraph about each of your graphs (four total) to predict whether the product will
demonstrate an increase or decrease in demand or supply and what will have to happen
economically (i.e., shortage, surplus, price increase, price decrease).
Consider a community of two families A and B, who contribute EA and EB dollars to
the community’s events budget. Community events are a public good and the total
quality of events provided E = EA + EB.
Assume each family has an annual income of $60 which it splits between the events
budget and all other consumption spending X. Family utility functions are
given by UA = XA^1/2 E^1/2 and UB = XB^1/2E^1/2.
(a) What event budget would maximize the social welfare function W = UA + UB?
(Study tip: You can either set up and solve the social planner’s problem, or
recall the necessary condition for optimal public good provision. I recommend
the latter.)
(b) If households privately decide how much to contribute to the event budget, what
will the total budget be?
(Study tip: Begin by finding each household’s best response to the other, then
solve. You can use the fact that the problem is symmetric to save time in this
step.)
Drawing diagram explain the process of “crowding out”. Also explain why the private
sector might find budget deficit detrimental to their business planned projects
Section D: Essay Writing. (500 words limit) (10 marks)
Write ONE essay from the following topics. Spend at least 80 minutes in this section.
1. Discuss the merits of a proposal that the government should impose a tax or subsidy where a non-renewable resource is supplied monopolistically in order to increase the social net benefit. You may contextualize this to your home-country or to a current development that you may be aware of. (10 marks)
1. Suppose that under the United States-Canada Air Quality Agreement, both countries agree to a combined 30 percent SO2 abatement standard. Further assume that the following SO2 abatement cost functions have been estimated by each country:
TACUS = 500 + 1.5(AUS)2
MACUS = 3 AUS
TACCAN = 1000 + 3(ACAN)2
MACCAN = 6 ACAN
A. If the countries implement a uniform abatement standard, find the resulting values of TAC and MAC for each nation. Based on these values, is there an economic incentive the two nations to participate in an emissions trading program? Explain. (10 marks)
B. Assuming a trading program is enacted, find the cost savings associated with a cost-effective abatement solution? (12 marks)
C. What must be the price of a tradeable permit to achieve the cost-effective abatement allocation? (3 marks)
1. Consider the following model of a hypothetical market for MSW management services:
MPB = 25 − 2Q
MPC = 4 + Q
MEC = 0.5Q,
where Q is the number of trash containers per household per month.
A. Quantitatively determine the effect of the resource misallocation due to: (12 marks)
a. the presence of the negative externality, and
b. the use of a flat fee pricing system in the presence of a negative externality.
B. Determine the dollar value of a waste-end charge that would restore efficiency to this market. Explain your answer intuitively. (3 marks)
1. Consider the following model of a hypothetical market for MSW management services:
MPB = 18.35 − 2Q
MPC = 2 + Q
MEC = 0.25Q,
where Q is the number of trash containers per household per month.
A. Quantitatively determine the effect of the resource misallocation due to:
i. the presence of the negative externality, and
ii. the use of a flat fee pricing system in the presence of a negative externality.
B. Determine the dollar value of a waste-end charge that would restore efficiency to this market. Explain your answer intuitively.
1. Consider the following model of a hypothetical market for MSW management services:
MPB = 18.35 − 2Q
MPC = 2 + Q
MEC = 0.25Q,
where Q is the number of trash containers per household per month.
A. Quantitatively determine the effect of the resource misallocation due to:
i. the presence of the negative externality, and
ii. the use of a flat fee pricing system in the presence of a negative externality.
B. Determine the dollar value of a waste-end charge that would restore efficiency to this market. Explain your answer intuitively.
On any given day there are 15,000 people who listen to Minnesota Public Radio (MPR). The per-person yearly benefit is $150. Twice a year MPR holds a fund raising drive requesting listeners contribute to keep their programming on the air.
What is the per-person incentive to make a contribution?
A. $0
B. $300
C. $30,000
D. $15,000,000
