Deck 4: Part A: Market Failures: Public Goods and Externalities

Question 1

Supply in a market is represented by the equation, P = 5 + .1QS.Suppose the market price is $30.(a) How many units do sellers wish to provide in this market?
(b) What is the minimum amount that sellers are willing to accept for this quantity of output?
(c) What is the actual amount that sellers receive for providing for this quantity of output?
(d) What is the producer surplus that sellers obtain for providing this quantity of output?

Answer 1

(a) 250 units; (b) $4375 [.5($30 - $5) $\times$ 250 + $5 $\times$ 250]; (c) $7500 ($30 $\times$ 250); (d) $3125.

Question 2

How are producer surplus and economic profit related?

Answer 2

Profit is equal to total revenue less total costs.Total cost can be further broken down into total variable cost and total fixed cost.In equation form: $\pi$ = TR - (TVC + TFC) = TR - TVC - TFC.At a production level of Q, a firm's producer surplus is the difference between its total revenues and the sum of its marginal costs (or its total variable costs).This means we can replace TR - TVC in our above equation with PS --> $\pi$ = PS - TFC or PS = $\pi$ + TFC (producer surplus is equal to the sum of economic profit and total fixed cost).

Question 3

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?

Answer 3

(a) 20 units; (b) $800 [.5($50 - $30) $\times$ 20 + $30 $\times$ 20]; (c) $600 ($30 $\times$ 20); (d) $200.

Question 4

What is producer surplus?

Question 5

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

Question 6

What is the meaning of Market Failures and how do the Demand and Supply curves cause such failures?

Question 7

How is consumer surplus derived from a demand curve?

Question 8

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.

Question 9

How is producer surplus derived from a supply curve?

Question 10

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

Question 11

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?

Question 12

What is consumer surplus?

Question 13

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

Question 14

What are the basic differences between a public good and a private good?

Question 15

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

Question 16

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

Question 17

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?

Question 18

Supply in a market is represented by the equation, P = 20 + .1QS.Suppose the market price is $30.(a) How many units do sellers wish to provide in this market?
(b) What is the minimum amount that sellers are willing to accept for this quantity of output?
(c) What is the actual amount that sellers receive for providing for this quantity of output?
(d) What is the producer surplus that sellers obtain for providing this quantity of output?

Question 19

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?

Question 20

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.

Question 21

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

Question 22

The following table shows marginal costs and benefits of the optimal quantity of pollution abatement that will occur at a local factory. (a) What is the optimal level of pollution abatement? Why?
(b) If the marginal benefit of pollution abatement were to increase by $150,000 at each level because of the factory's desire to improve its image and environment, what would the optimal level be? Why?
(c) What might cause the optimal level of pollution abatement to be 120 tonnes?

Question 23

How do direct controls and specific taxes affect negative externalities? Briefly explain in terms of supply and demand.

Question 24

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

Question 25

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

Question 26

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

Question 27

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?

Question 28

The following table shows marginal costs and benefits of the optimal quantity of pollution abatement that will occur at a local factory. (a) What is the optimal level of pollution abatement? Why?
(b) If the marginal benefit of pollution abatement were to increase by $30,000 at each level because of the factory's desire to improve its image and environment, what would the optimal level be? Why?
(c) What might cause the optimal level of pollution abatement to be 400 tonnes?

Question 29

Draw a supply and demand graph on the below diagram that illustrates the market for pollution rights.Label the axes and curves.Then show what happens to price and quantity when the demand for pollution rights increases in the market.

Question 30

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

Question 31

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

Question 32

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

Question 33

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

Question 34

Assume the atmosphere of an urban area is able to reabsorb 4,000 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?

Question 35

The demand and supply in a market are represented by the equations P = 50 - .2QD and P = 20 + .3QS.A spillover cost in production equal to $2 per unit exists in this market.(a) What are the equilibrium price and quantity?
(b) What are the optimal price and quantity?
(c) How large must a specific tax in this market be to eliminate the market failure? Is the tax equal to the difference between the equilibrium price and the optimal price?

Question 36

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?