Quiz#2 Key

Quiz#2 Key - < Quiz II: Answer Key > (ECON 2: Spring...

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< Quiz II: Answer Key > (ECON 2: Spring 2008) ( Market Imperfection and Policies; Prof. Young-Han Kim ) 1. Assume that the UCSD computer server services are rivaled services while it is free as non-excludable services. The total social benefit from the server services are:TSB = 200(X ) - (X ) 2 where X is the number of computers connected, and there is no private ownership of the computer server. The marginal cost of using additional computer is 40 per computer. i) What is the socially efficient number of computers connected to the server and the total social value of computer server services? (20 points) W T MSB MC a b c MPB o Socially efficient fishing level is achieved where MSC = MSB Î 40 = 200-2X Î X = 80, TSB = 9600 [[The following discussion might appear in the answer of part ii) ]] o When there is no intervention (by UCSD), computer users in UCSD try to maximize the private benefits by connecting to computer server such that MPB = MSC. Marginal private benefit(MPB) in this example is the private benefit obtainable with one unit of computer connected to the server, which is: MPB=200-X Î MPB =200 –X = 40 Î X* = 160, TSB = 6400 * Therefore, the excess fishing compared to socially efficient level would be: 160 - 80= 80 Î From this example, we can observe the tragedy of common resources. ii) If UCSD issues ITQ (Individual Transferable Quota) on the use of the computer server to maximize the social welfare, what would be the price of an ITQ? (Explain with diagram in addition to deriving the numerical value of the ITQ.) (15 points) O If government imposes ITQ, imposing the quota at the socially optimal level, 80, private sectors are ready to
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Quiz#2 Key - &lt; Quiz II: Answer Key &gt; (ECON 2: Spring...

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