Econ nguyen final 2

The accompanying table shows six consumers' willingness to pay (his or her individual marginal benefit) for one MP3 file copy of a Jay-Z album. The marginal cost of making the file accessible to one additional consumer is constant, at zero. What would be the efficient price to charge for a download of the file?

0

The accompanying table shows Tanisha's and Ari's individual marginal benefit of different amounts of street cleanings per month. Suppose that the marginal cost of street cleanings is constant at $9 each. If Tanisha had to pay for street cleaning on her own, how many street cleanings would there be?

1

The accompanying table shows Tanisha's and Ari's individual marginal benefit of different amounts of street cleanings per month. Suppose that the marginal cost of street cleanings is constant at $9 each. Calculate the marginal social benefit of street cleaning. What is the optimal number of street cleanings?

2

The accompanying table shows six consumers' willingness to pay (his or her individual marginal benefit) for one MP3 file copy of a Jay-Z album. The marginal cost of making the file accessible to one additional consumer is constant, at zero. All six consumers are able to download the file for free from a file-sharing service, Pantster. Which consumers will download the file? What will be the total consumer surplus to those consumers?

All 6 will download the file. The total consumer surplus is therefore $2 + $15 + $1 + $10 + $5 + $4 = $37.

The accompanying table shows six consumers' willingness to pay (his or her individual marginal benefit) for one MP3 file copy of a Jay-Z album. The marginal cost of making the file accessible to one additional consumer is constant, at zero. Pantster is shut down for copyright law infringement. In order to download the file, consumers now have to pay $4.99 at a commercial music site. Which consumers will download the file? What will be the total consumer surplus to those consumers? How much producer surplus accrues to the commercial music site? What is the total surplus? What is the deadweight loss from the new pricing policy?

Bhagesh, Denzel, and Emma will download the file, Bhagesh's individual consumer surplus will be $10.01, Denzel's $5.01, and Emma's $0.01. So total consumer surplus is $10.01 + $5.01 + $0.01 = $15.03, Producer surplus is 3 × $4.99 = $14.97. So total surplus is $15.03 + $14.97 = $30. This is $7 less than in part b. So the deadweight loss from making the good artificially scarce is $7.

The two dry-cleaning companies in Collegetown, College Cleaners and Big Green Cleaners, are a major source of air pollution. Together they currently produce 350 units of air pollution, which the town wants to reduce to 200 units. The accompanying table shows the current pollution level produced by each company and each company's marginal cost of reducing its pollution. The marginal cost is constant. What is the total cost to the two companies of the pollution controls under this voucher system?

Big Green Cleaners will reduce its output of pollution to zero, which will cost it 120 × $2 = $240. College Cleaners will now have 200 vouchers and can emit 200 units of pollution, 30 fewer than before. This will cost College Cleaners 30 × $5 = $150. So the total cost of pollution control under this system is $240 + $150 = $390.

Voluntary environmental programs were extremely popular in the United States, Europe, and Japan in the 1990s. Part of their popularity stems from the fact that these programs do not require legislative authority, which is often hard to obtain. The 33/50 program started by the Environmental Protection Agency (EPA) is an example of such a program. With this program, the EPA attempted to reduce industrial emissions of 17 toxic chemicals by providing information on relatively inexpensive methods of pollution control. Companies were asked to voluntarily commit to reducing emissions from their 1988 levels by 33% by 1992 and by 50% by 1995. The program actually met its second target by 1994. Suppose the plants whose marginal benefit curves you depicted in part a were participants in the 33/50 program. In a replica of your graph from part a, mark targeted levels of pollution in 1995 for the two plants. Which plant was required to reduce emissions more? Was this solution necessarily efficient?

Both firms had to reduce their emissions by the same amount. This was not nec- essarily efficient: since at the quantity Q1995, plant B had a higher marginal benefit of pollution

The two dry-cleaning companies in Collegetown, College Cleaners and Big Green Cleaners, are a major source of air pollution. Together they currently produce 350 units of air pollution, which the town wants to reduce to 200 units. The accompanying table shows the current pollution level produced by each company and each company's marginal cost of reducing its pollution. The marginal cost is constant. Suppose that Collegetown passes an environmental standards law that limits each company to 100 units of pollution. What would be the total cost to the two companies of each reducing its pollution emissions to 100 units? Suppose instead that Collegetown issues 100 pollution vouchers to each company, each entitling the company to one unit of pollution, and that these vouchers can be traded.

College Cleaners would have to reduce its pollution level by 130 units, costing it 130 × $5 = $650. Big Green Cleaners would have to reduce its pollution level by 20 units, costing it 20 × $2 = $40. So the total cost of reducing pollution to a total of 200 units would be $650 + $40 = $690.

EMarketplace complained to the Justice Department that EAuction's practice of eliminating fees for new sellers was anti-competitive and would lead to monopolization of the internet auction industry. Is EMarketplace correct? How should the Justice Department respond?

EMarketplace is correct, the actions taken to gain a monopoly advantage are illegal, the Justice Department should intervene and stop EAuction's practice of eliminating fees for new sellers.

The village of Upper Bigglesworth has a village "commons," a piece of land on which each villager, by law, is free to graze his or her cows. Use of the commons is measured in units of the number of cows grazing on it. Assume that the marginal private cost curve of cow-grazing on the commons is upward sloping (say due to more time spent herding). There is also a marginal social cost curve of cow-grazing on the commons: each additional cow grazed means less grass available for others, and the damage done by overgrazing of the commons increases as the number of cows grazing increases. Finally, assume that the private benefit to the villagers of each additional cow grazing on the commons declines as more cows graze, since each additional cow has less grass to eat than the previous one. The villagers hire you to tell them how to achieve an efficient use of the commons. You tell them that there are three possibilities: a Pigouvian tax, the assignment of property rights over the commons, and a system of tradable licenses for the right to graze a cow. Explain how each one of these options would lead to an efficient use of the commons. In the assignment of property rights, assume that one person is assigned the rights to the commons and the rights to all the cows. Draw a diagram that shows the Pigouvian tax.

Each individual villager would now make the socially optimal, or efficient, decision. Ownership of the commons and the cows could be assigned to one person. He or she would set the amount of grazing to the efficient quantity, also villagers could create a system of tradable licenses for grazing one cow, where the number of licenses issued is equal to the efficient quantity of grazing.

The two dry-cleaning companies in Collegetown, College Cleaners and Big Green Cleaners, are a major source of air pollution. Together they currently produce 350 units of air pollution, which the town wants to reduce to 200 units. The accompanying table shows the current pollution level produced by each company and each company's marginal cost of reducing its pollution. The marginal cost is constant. Who will sell vouchers and who will buy them? How many vouchers will be traded?

Each voucher is worth more to College Cleaners than to Big Green Cleaners, so Big Green Cleaners will sell all of its 100 vouchers to College Cleaners

Your economics professor assigns a group project for the course. Describe the free-rider problem that can lead to a suboptimal outcome for your group. To combat this problem, the instructor asks you to evaluate the contribution of your peers in a confidential report. Will this evaluation have the desired effects?

Everyone will likely underperform because they're working in a group so yes evaluating will help because the people in the group will work harder

Many dairy farmers in California are adopting a new technology that allows them to produce their own electricity from methane gas captured from animal waste. (One cow can produce up to 2 kilowatts a day.) This practice reduces the amount of methane gas released into the atmosphere. In addition to reducing their own utility bills, the farmers are allowed to sell any electricity they produce at favorable rates. Suppose some dairy farmers have lower costs of transforming methane into electricity than others. Explain how this system of capturing and selling methane gas leads to an efficient allocation of emissions reduction among farmers.

Farmers who have a lower cost of capturing methane will generate more profit from transformation of their methane than farmers who have a higher cost. farmers with lower costs will transform more units of methane gas into electricity than will farmers with higher costs. As a result, emissions reduction will be allocated efficiently among dairy farmers.

Software has historically been an artificially scarce good—it is nonrival because the cost of replication is negligible once the investment to write the code is made, but software companies make it excludable by charging for user licenses. But then open-source software emerged, most of which is free to download and can be modified and maintained by anyone. Discuss the free-rider problem that might exist in the development of open-source software. What effect might this have on quality? Why does this problem not exist for proprietary software, such as the products of a company like Microsoft or Adobe?

Microsoft and Adobe, however, are responsible for the quality of their software; they risk losing business and profits if their product is substandard. So company management enforces quality-control measures that mitigate the free-rider problem.

Which of the following are characterized by network externalities? Which are not? Explain. The choice between purchasing a Toyota versus a Ford

No, it is not characterized by a network externality

Which of the following are characterized by network externalities? Which are not? Explain. The choice of whether to purchase an iPod Touch or an iPod Nano.

No, it is not characterized by a network externality

EAuction stopped its practice of eliminating fees for new sellers. But since it provided much better technical service than its rival, EMarketplace, buyers and sellers came to prefer EAuction. Eventually, EMarketplace closed down, leaving EAuction as a monopolist. Should the Justice Department intervene to break EAuction into two companies? Explain.

No, the Justice Department should not intervene because EAuction did nothing illegal because it became a monopolist through providing better service

Anyone with a radio receiver can listen to public radio, which is funded largely by donations. Is public radio excludable or nonexcludable? Is it rival in consumption or nonrival? What type of good is it?

Nonexcludable, nonrival, public good

The village of Upper Bigglesworth has a village "commons," a piece of land on which each villager, by law, is free to graze his or her cows. Use of the commons is measured in units of the number of cows grazing on it. Assume that the marginal private cost curve of cow-grazing on the commons is upward sloping (say due to more time spent herding). There is also a marginal social cost curve of cow-grazing on the commons: each additional cow grazed means less grass available for others, and the damage done by overgrazing of the commons increases as the number of cows grazing increases. Finally, assume that the private benefit to the villagers of each additional cow grazing on the commons declines as more cows graze, since each additional cow has less grass to eat than the previous one. Is the commons excludable or nonexcludable? Is it rival in consumption or nonrival? What kind of good is the commons?

Nonexcludable, rival, common resource

An economist gives the following advice to a museum director: "You should introduce 'peak pricing.' At times when the museum has few visitors, you should admit visitors for free. And at times when the museum has many visitors, you should charge a higher admission fee." When the museum is quiet, is it rival or nonrival in consumption? Is it excludable or nonexcludable? What type of good is the museum at those times? What would be the efficient price to charge visitors during that time, and why?

Nonrival and excludable, scarce good, efficient admission fee would be 0.

The government is involved in providing many goods and services. For each of the goods or services listed, determine whether it is rival or nonrival in consumption and whether it is excludable or nonexcludable. What type of good is it? Without government involvement, would the quantity provided be efficient, inefficiently low, or inefficiently high?

Nonrival and nonexcludable, public good, inefficiently low

The government is involved in providing many goods and services. For each of the goods or services listed, determine whether it is rival or nonrival in consumption and whether it is excludable or nonexcludable. What type of good is it? Without government involvement, would the quantity provided be efficient, inefficiently low, or inefficiently high? Regulations limiting pollution

Nonrival and nonexcludable, public good, inefficiently low

The government is involved in providing many goods and services. For each of the goods or services listed, determine whether it is rival or nonrival in consumption and whether it is excludable or nonexcludable. What type of good is it? Without government involvement, would the quantity provided be efficient, inefficiently low, or inefficiently high? Street signs

Nonrival and nonexcludable, public good, inefficiently low

The two dry-cleaning companies in Collegetown, College Cleaners and Big Green Cleaners, are a major source of air pollution. Together they currently produce 350 units of air pollution, which the town wants to reduce to 200 units. The accompanying table shows the current pollution level produced by each company and each company's marginal cost of reducing its pollution. The marginal cost is constant. How much is each pollution voucher worth to College Cleaners? To Big Green Cleaners? (That is, how much would each company, at most, be willing to pay for one more voucher?)

One pollution voucher is worth $5 to College Cleaners and $2 to Big Green Cleaners.

An economist gives the following advice to a museum director: "You should introduce 'peak pricing.' At times when the museum has few visitors, you should admit visitors for free. And at times when the museum has many visitors, you should charge a higher admission fee." When the museum is busy, is it rival or nonrival in consumption? Is it excludable or nonexcludable? What type of good is the museum at those times? What would be the efficient price to charge visitors during that time, and why?

Rival and excludable, private good, efficient admission fee would be eual to marginal external cost

The government is involved in providing many goods and services. For each of the goods or services listed, determine whether it is rival or nonrival in consumption and whether it is excludable or nonexcludable. What type of good is it? Without government involvement, would the quantity provided be efficient, inefficiently low, or inefficiently high? Amtrak rail service

Rival and excludable, private good, inefficiently low

The government is involved in providing many goods and services. For each of the goods or services listed, determine whether it is rival or nonrival in consumption and whether it is excludable or nonexcludable. What type of good is it? Without government involvement, would the quantity provided be efficient, inefficiently low, or inefficiently high? A congested interstate highway without tolls

Rival and nonexcludable, private good, inefficiently low

Anyone with a radio receiver can listen to public radio, which is funded largely by donations. In order to finance itself, public radio decides to transmit only to satellite radios, for which users have to pay a fee. What type of good is public radio then? Will the quantity of radio listening be efficient? Why or why not?

Scarce good, it will be inefficiently low

Butchart Gardens is a very large garden in Victoria, British Columbia, renowned for its beautiful plants. It is so large that it could hold many times more visitors than currently visit it. The garden charges an admission fee of approximately $30. At this price, 1,000 people visit the garden each day. If admission were free, 2,000 people would visit each day. Illustrate the deadweight loss from charging a $30 admission fee. Explain why charging a $30 admission fee is inefficient.

Since the marginal cost of admitting one more visitor is zero, it would be efficient to charge no admission

The accompanying table shows Tanisha's and Ari's individual marginal benefit of different amounts of street cleanings per month. Suppose that the marginal cost of street cleanings is constant at $9 each. Consider the optimal number of street cleanings. The last street cleaning of that number costs $9. Is Tanisha willing to pay for that last cleaning on her own? Is Ari willing to pay for that last cleaning on his own?

Tanisha will pay $6 and Ari will pay $4 so neither will be paying individually

Voluntary environmental programs were extremely popular in the United States, Europe, and Japan in the 1990s. Part of their popularity stems from the fact that these programs do not require legislative authority, which is often hard to obtain. The 33/50 program started by the Environmental Protection Agency (EPA) is an example of such a program. With this program, the EPA attempted to reduce industrial emissions of 17 toxic chemicals by providing information on relatively inexpensive methods of pollution control. Companies were asked to voluntarily commit to reducing emissions from their 1988 levels by 33% by 1992 and by 50% by 1995. The program actually met its second target by 1994. What kind of environmental policy does the 33/50 program most closely resemble? What is the main shortcoming of such a policy? Compare it to two other types of environmental policies discussed in this chapter.

The 33/50 program set an environmental standard, its inflexibility often prevents pollution reductions from being achieved at the lowest cost. Tradable permits and emissions taxes are more flexible policies than an environmental standard.

In developing a vaccine for the SARS virus, a pharmaceutical company incurs a very high fixed cost. The marginal cost of delivering the vaccine to patients, however, is negligible (consider it to be equal to zero). The pharmaceutical company holds the exclusive patent to the vaccine. You are a regulator who must decide what price the pharmaceutical company is allowed to charge. Draw a diagram that shows the price for the vaccine that would arise if the company is unregulated, and label it PM. What is the efficient price for the vaccine? Show the deadweight loss that arises from the price PM.

The efficient price would be 0

The city of Falls Church, Virginia, subsidizes the planting of trees in homeowners' front yards when they are within 15 feet of the street. Using concepts in the chapter, explain why a municipality would subsidize planting trees on private property, but near the street.

They provide shade and so keep streets and sidewalks cooler, which makes activities such as walking and bicycling, beautify neighborhoods and can raise property values, provide habitat for wildlife which helps to preserve biodiversity.

In many planned communities, various aspects of community living are subject to regulation by a homeowners' association. These rules can regulate house architecture; require snow removal from sidewalks; exclude outdoor equipment, such as backyard swimming pools; require appropriate conduct in shared spaces such as the community clubhouse; and so on. Suppose there has been some conflict in one such community because some homeowners feel that some of the regulations mentioned above are overly intrusive. You have been called in to mediate. Using what you have learned about public goods and common resources, how would you decide what types of regulations are warranted and what types are not?

Using efficiency as the goal, a regulation is warranted if it provides a public good or if it conserves a common resource. The regulation of private goods in the community is unwarranted.

Many dairy farmers in California are adopting a new technology that allows them to produce their own electricity from methane gas captured from animal waste. (One cow can produce up to 2 kilowatts a day.) This practice reduces the amount of methane gas released into the atmosphere. In addition to reducing their own utility bills, the farmers are allowed to sell any electricity they produce at favorable rates. Explain how the ability to earn money from capturing and transforming methane gas behaves like a Pigouvian tax on methane gas pollution and can lead dairy farmers to emit the efficient amount of methane gas pollution.

Without the new technology, dairy farmers will release methane gas until the marginal social benefit of emissions is zero. With the new technology, there is now an opportunity cost to the farmer from releasing methane. The financial reward forgone if a farmer emits the methane gas acts like a Pigouvian tax on emissions.

Anyone with a radio receiver can listen to public radio, which is funded largely by donations. Should the government support public radio? Explain your reasoning.

Yes they should because individuals are not willing to pay for the efficient level of public radio programming

Which of the following are characterized by network externalities? Which are not? Explain. The choice between installing 110-volt electrical current in structures rather than 220-volt

Yes, it is characterized by a network externality

Which of the following are characterized by network externalities? Which are not? Explain. The choice of a printer, where each printer requires its own specific type of ink cartridge

Yes, it is characterized by a network externality

EAuction is now a monopolist in the internet auction industry. It also owns a site that handles payments over the internet, called PayForlt. It is competing with another internet payment site, called PayBuddy. EAuction has now stipulated that any transaction on its auction site must use PayForIt, rather than PayBuddy, for the payment. Should the Justice Department intervene? Explain.

Yes, the Justice Department should intervene, EAuction is using its monopoly position in one industry to gain a monopoly in the Internet payment industry.

In developing a vaccine for the SARS virus, a pharmaceutical company incurs a very high fixed cost. The marginal cost of delivering the vaccine to patients, however, is negligible (consider it to be equal to zero). The pharmaceutical company holds the exclusive patent to the vaccine. You are a regulator who must decide what price the pharmaceutical company is allowed to charge. Suppose you have accurate information about the pharmaceutical company's fixed cost. How could you use price regulation of the pharmaceutical company, combined with a subsidy to the company, to have the efficient quantity of the vaccine provided at the lowest cost to the government?

You could regulate the company's price to be equal to zero.

Voluntary environmental programs were extremely popular in the United States, Europe, and Japan in the 1990s. Part of their popularity stems from the fact that these programs do not require legislative authority, which is often hard to obtain. The 33/50 program started by the Environmental Protection Agency (EPA) is an example of such a program. With this program, the EPA attempted to reduce industrial emissions of 17 toxic chemicals by providing information on relatively inexpensive methods of pollution control. Companies were asked to voluntarily commit to reducing emissions from their 1988 levels by 33% by 1992 and by 50% by 1995. The program actually met its second target by 1994. Do you expect the total quantity of pollution before the program was put in place to have been less than or more than the optimal quantity of pollution? Why?

above the optimal quantity because pollution generates a negative externality.

Butchart Gardens is a very large garden in Victoria, British Columbia, renowned for its beautiful plants. It is so large that it could hold many times more visitors than currently visit it. The garden charges an admission fee of approximately $30. At this price, 1,000 people visit the garden each day. If admission were free, 2,000 people would visit each day. Are visits to Butchart Gardens excludable or nonexcludable? Are they rival in consumption or nonrival? What type of good is it?

excludable, nonrival, scarce good

Fishing for sablefish has been so intensive that sablefish were threatened with extinction. After several years of banning such fishing, the government is now proposing to introduce tradable vouchers, each of which entitles its holder to a catch of a certain size. Explain how uncontrolled fishing generates a negative externality and how the voucher scheme may overcome the inefficiency created by this externality.

it will limit the size of the total catch to the socially optimal quantity. And since the vouchers are tradable, fishermen who are more efficient will buy vouchers from less efficient ones, so only the most efficient fishermen will operate.

EAuction and EMarketplace are two competing internet auction sites, where buyers and sellers transact goods. Each auction site earns money by charging sellers for listing their goods. EAuction has decided to eliminate fees for the first transaction for sellers that are new to its site. Explain why this is likely to be a good strategy for EAuction in its competition with EMarketplace.

more sellers will come to EAuction than to EMarketplace, also drawing more buyers to EAuction than to EMarketplace.

What type of externality (positive or negative) is present in each of the following examples? Is the marginal social benefit of the activity greater than or equal to the marginal benefit to the individual? Is the marginal social cost of the activity greater than or equal to the marginal cost to the individual? Without intervention, will there be too little or too much (relative to what would be socially optimal) of this activity? Your next-door neighbor likes to build bonfires in his backyard, and sparks often drift onto your house.

negative externality, the marginal social cost is greater than the marginal cost incurred by your neighbor, more bonfires

What type of externality (positive or negative) is present in each of the following examples? Is the marginal social benefit of the activity greater than or equal to the marginal benefit to the individual? Is the marginal social cost of the activity greater than or equal to the marginal cost to the individual? Without intervention, will there be too little or too much (relative to what would be socially optimal) of this activity? Justine buys a large SUV that consumes a lot of gasoline.

negative externality: the marginal social cost is greater than the marginal cost incurred by Justine, more people will purchase SUVs

What type of externality (positive or negative) is present in each of the following examples? Is the marginal social benefit of the activity greater than or equal to the marginal benefit to the individual? Is the marginal social cost of the activity greater than or equal to the marginal cost to the individual? Without intervention, will there be too little or too much (relative to what would be socially optimal) of this activity? Maija, who lives next to an apple orchard, decides to keep bees to produce honey.

positive externality, the marginal social benefit is greater than the marginal benefit to Maija, fewer bees

According to a report from the U.S. Census Bureau, "the average [lifetime] earnings of a full-time, year round worker with a high school education are about $1.2 million compared with $2.1 million for a college graduate." This indicates that there is a considerable benefit to a graduate from investing in his or her own education. Tuition at most state universities covers only about two-thirds to three-quarters of the cost, so the state applies a Pigouvian subsidy to college education. If a Pigouvian subsidy is appropriate, is the externality created by a college education a positive or a negative externality? What does this imply about the differences between the costs and benefits to students compared to social costs and benefits? What are some reasons for the differences?

positive externality, the marginal social benefit of education is higher than the marginal benefit going to graduates, reasons are that their increased human capital makes other people in the economy more productive and they are more likely to realize cultural and social achievements from which all of society benefits.

What type of externality (positive or negative) is present in each of the following examples? Is the marginal social benefit of the activity greater than or equal to the marginal benefit to the individual? Is the marginal social cost of the activity greater than or equal to the marginal cost to the individual? Without intervention, will there be too little or too much (relative to what would be socially optimal) of this activity? Mr. Chau plants lots of colorful flowers in his front yard.

positive externality, the marginal social benefit of looking at the flowers is greater than the marginal benefit to Mr. Chau, fewer flowers will be planted