PS 03.Key

# PS 03.Key - ANSWERS TO PROBLEM SET 3 Economics 335 J...

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MB x MCpri MCsoc y MCsoc x MB y steel \$ tax x tax y steel x steel y ANSWERS TO PROBLEM SET 3 - Economics 335 J. Wissink - Cornell University 1. No, logrolling does not necessarily improve the efficiency of voting. See the section on logrolling in the Rosen text. In the 8 th edition it starts on page 112. 2. The answer depends on the steepness or flatness of the MC of pollution reduction function. Holding the slope of the marginal social benefit constant, and just repositioning it in “space” after the fact, note the following. If the MC of pollution reduction is very steep, then you err less with a cap and trade policy based on predicted MSB. If the MC of pollution reduction is flat, then you err less with an emissions fee policy based on a predicted MSB. MAKE SURE YOU CAN DRAW IT AND CONVINCE YOURSELF. 3. Recall: tc honey = H 2 /100 and tc apples = A 2 /100 - H and P honey =2 and P apples =3 a. Each firm sets mr=mc ignoring the output of the other. In honey, mr=P=2 and mc=2H/100=H/50. So 2=H/50 which implies that H=100. In apples, mr=P=3 and mc=2A/100= A/50. So 3=A/50 which implies that A=150. b. If they merge, then the positive honey externality will be internalized and when the honey division makes its honey choice it will consider its effect on the apple cost function. So profit is now: [2H+3A] - [H 2 /100+A 2 /100 - H]. To solve for apples take the partial with respect to apples and set it equal to zero and get: 3-A/50 = 0, and solving you get A=150. Doing the same for honey you get: 2-H/50+1 = 0, and solving you get H=150! c. The socially efficient amount of honey is H=150, as solved above. 4. See graph: a. I would advocate for UNIFORM steel output levels. Note: The MB and MC curves match up at almost the same optimal amount of steel but at very different Pigouvian taxes. So if you have to

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