undertake bigger reductions?
7. The many identical residents of Whoville love drinking Zlurp. Each resident has the following willingness to pay for the tasty refreshment:
First bottle $5 Second bottle 4 Third bottle 3 Fourth bottle 2 Fifth bottle 1 Further bottles 0
a. The cost of producing Zlurp is $1.50, and the competitive suppliers sell it at this price. (The supply curve is horizontal.) How many bottles will each Whovillian consume? What is each person‘s consumer surplus? b. Producing Zlurp creates pollution. Each bottle has an external cost of $1. Taking this additional cost into account, what is total surplus per person in the allocation you described in part (a)?
c. Cindy Lou Who, one of the residents of Whoville, decides on her own to reduce her consumption of Zlurp by one bottle. What happens to Cindy‘s welfare (her consumer surplus minus the cost of pollution she experiences)? How does Cindy‘s decision affect total surplus in Whoville?
d. Mayor Grinch imposes a $1 tax on Zlurp. What is consumption per person now? Calculate consumer surplus, the external cost, government revenue, and total surplus per person.
e. Based on your calculations, would you support the mayor‘s policy? Why or why not? 8. Ringo loves playing rock ?n‘ roll music at high volume. Luciano loves opera and hates rock ?n‘ roll. Unfortunately, they are next-door neighbors in an apartment building with paper-thin walls.
a. What is the externality here?
b. What command-and-control policy might the landlord impose? Could such a policy lead to an inefficient outcome?
c. Suppose the landlord lets the tenants do
whatever they want. According to the Coase theorem, how might Ringo and Luciano reach an efficient outcome on their own? What might prevent them from reaching an efficient outcome?
9. Figure 4 shows that for any given demand curve for the right to pollute, the government can achieve the same outcome either by setting a price with a corrective tax or by setting a quantity with pollution permits. Suppose there is a sharp improvement in the technology for controlling pollution.
a. Using graphs similar to those in Figure 4, illustrate the effect of this development on the demand for pollution rights.
b. What is the effect on the price and quantity of pollution under each regulatory system? Explain.
10. Suppose that the government decides to issue tradable permits for a certain form of pollution. a. Does it matter for economic efficiency whether the government distributes or auctions the permits? Why or why not? b. If the government chooses to distribute the permits, does the allocation of permits among firms matter for efficiency? Explain.
11. There are three industrial firms in Happy Valley.
Initial Cost of Reducing
Firm Pollution Level Pollution by 1 Unit
A 70 units $20 B 80 units $25 C 50 units $10
The government wants to reduce pollution to 120 units, so it gives each firm 40 tradable pollution permits.
a. Who sells permits and how many do they sell? Who buys permits and how many do they buy? Briefly explain why the sellers and buyers are each willing to do so. What is the total cost of pollution reduction in this situation?
b. How much higher would the costs of pollution reduction be if the permits could not be traded
1. Think about the goods and services provided by your local government.
a. Using the classification in Figure 1, explain which category each of the following goods falls into:
? police protection ? snow plowing ? education ? rural roads ? city streets
b. Why do you think the government provides items that are not public goods?
2. Both public goods and common resources involve externalities.
a. Are the externalities associated with public goods generally positive or negative? Use examples in your answer. Is the free-market quantity of public goods generally greater or less than the efficient quantity?
b. Are the externalities associated with common resources generally positive or negative? Use examples in your answer. Is the free-market use of common resources generally greater or less than the efficient use?
3. Charlie loves watching Teletubbies on his local public TV station, but he never sends any money to support the station during its fundraising drives.
a. What name do economists have for people like Charlie?
b. How can the government solve the problem caused by people like Charlie?
c. Can you think of ways the private market can solve this problem? How does the existence of cable TV alter the situation?
4. Wireless, high-speed Internet is provided for free in the airport of the city of Communityville. a. At first, only a few people use the service. What type of a good is this and why? b. Eventually, as more people find out about the service and start using it, the speed of the connection begins to fall. Now what type of a
good is the wireless Internet service? c. What problem might result and why? What is one possible way to correct this problem? 5. Four roommates are planning to spend the weekend in their dorm room watching old movies, and they are debating how many to watch. Here is their willingness to pay for each film:
Judd Joel Gus Tim
First film $7 $5 $3 $2 Second film 6 4 2 1 Third film 5 3 1 0 Fourth film 4 2 0 0 Fifth film 3 1 0 0
a. Within the dorm room, is the showing of a movie a public good? Why or why not? b. If it costs $8 to rent a movie, how many movies should the roommates rent to maximize total surplus?
c. If they choose the optimal number from part (b) and then split the cost of renting the movies equally, how much surplus does each person obtain from watching the movies? d. Is there any way to split the cost to ensure that everyone benefits? What practical problems does this solution raise? e. Suppose they agree in advance to choose the efficient number and to split the cost of the movies equally. When Judd is asked his willingness to pay, will he have an incentive to tell the truth? If so, why? If not, what will he be tempted to say?
f. What does this example teach you about the optimal provision of public goods?
6. Some economists argue that private firms will not undertake the efficient amount of basic scientific research.
a. Explain why this might be so. In your answer, classify basic research in one of the categories shown in Figure 1.
b. What sort of policy has the United States adopted in response to this problem?
c. It is often argued that this policy increases the technological capability of American producers