SOLUTION PS9 - ECO 100 Problem Set#9 SOLUTIONS Do Problems...

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ECO 100 Problem Set #9 SOLUTIONS Do Problems 6 , 7, 8, 9, 10 and 12 on pages 221-222 of Mankiw. 6. a. The market for alcohol is shown in Figure 3. The social value curve is below the demand curve because of the negative externality from increased motor vehicle accidents caused by those who drink and drive. The free-market equilibrium level of output is Q market and the efficient level of output is Q optimum . b. The triangular area between points A, B, and C represents the deadweight loss of the market equilibrium. This area shows the amount by which social costs exceed social value for the quantity of alcohol consumption beyond the efficient level. 7. a. It is efficient to have different amounts of pollution reduction at different firms because the costs of reducing pollution differ across firms. If they were all made to reduce pollution by the same amount, the costs would be low at some firms and prohibitive at others, imposing a greater burden overall. b. Command-and-control approaches that rely on uniform pollution reduction among firms give the firms no incentive to reduce pollution beyond the mandated amount. Instead, every firm will reduce pollution by just the amount required and no more. c. Corrective taxes or tradable pollution rights give firms greater incentives to reduce pollution. Firms are rewarded by paying lower taxes or spending less on permits if they find methods to reduce pollution, so they have the incentive to engage in research on pollution control. The government does not have to figure out which firms can reduce pollution the most - it lets the market give firms the incentive to reduce pollution on their own.
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8. a. If the government knew the cost of reduction at each firm, it would have Acme eliminate all its pollution (at a cost of $10 per ton times 100 tons = $1,000) and have Creative
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SOLUTION PS9 - ECO 100 Problem Set#9 SOLUTIONS Do Problems...

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