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Exam 4: Market Failures: Public Goods and Externalities

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

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When spillover costs arise in production,firms are not paying the full costs of production and an overallocation of resources to the industry occurs.The five ways for correcting for this overallocation of resources are:(1)individual bargaining; (2)the use of liability rules and lawsuits; (3)imposing a tax on producers; (4)direct controls such as legal mandates or restrictions;and (5)creating a market for externality rights.

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

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Free-riding is the a...

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

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

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

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

Demand is represented by the equation,P = 20 - 0.2Q_D and supply by the equation P = 5 + 0.1Q_S. (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 40^th unit? What is the marginal cost of the 40^th 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.

What is producer surplus?

The following table shows marginal costs and benefits of the optimal quantity of pollution abatement that will occur at a local factory.

How is consumer surplus derived from a demand curve?

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

Demand in a market is represented by the equation,P = 30 - .5Q_D.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.

How are producer surplus and economic profit related?

Demand is represented by the equation,P = 200 - 2Q_D and supply by the equation P = 25 + 3Q_S. (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.

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.

Data on two individuals' preferences for a public good are reflected in the table below.P_A and P_B represent the prices individuals A and B,the only two people in the society,are willing to pay for the last unit of a public good,rather than do without.

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

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