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

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Question 1

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

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Liability rules help to specify property...

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Question 2

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

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Quasi-public goods are goods provided by the government that fit the economist's definition of a public good but can be produced in such a way that exclusion would be possible.Such quasi-public goods include education, streets and highways, police and fire protection, libraries and museums, preventive medicine, and sewage disposal.They could all be priced and provided by private firms through the market system.But because they all have substantial positive externalities, they would be underproduced by the market system.Therefore, government often provides them to avoid the underallocation of resources that would otherwise occur.

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

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

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?

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.

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?

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?

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

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?

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?

How are producer surplus and economic profit related?

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

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

How is consumer surplus derived from a demand curve?

How is producer surplus derived from a supply curve?

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?

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

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

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.