aps9x313_f05 - Note: the private traders gain surplus of $2...

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1) Recall Abe and Betty from the workbook problem set #9 Q2. a) See the answer key to the web work book problem for the contract curve b) You can’t determine until you are given an endowment point and then it would be the subset of the contract curve created by where the two indifference curves that go through the endowment point go through the contract curve. c) See graph. d) For a utilitarian, any allocation on the segment ST where the slope of the upf is -1. e) For a Rawlsian, then it’s the allocation where they both get 100 utils. 2) Suppose that the private marginal benefit for commodity X is given by MB private = 10 - X, MC private = $5 and MC kids = $2 a) Set MBprivate = MCprivate. Get Xmkt=5 b) Set MBprivate = MCprivate + MCkids and get X=3 c) The deadweight loss if society ignores this externality is $2.
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Unformatted text preview: Note: the private traders gain surplus of $2 by going from 3 units to 5, but the kids are worse off having incurred pollution costs of $4 so there is a net $2 loss if the externality is ignored. d) Set a tax per unit of $2 and collect from suppliers and you will bump up MCprivate by $2, so that now it equals $7. So set MBprivate = MCprivate + tax and you would get X=3, the Pareto efficient level. e) No, the private traders are worse off having lost surplus of $2. But note that the kids are better off having saved pollution costs of $4 so there is a net $2 gain! f) Government revenue is $6. UPF 50 100 150 200 250 100 200 300 uAbe uBetty note slope=-.5 note slope = -1 helping line S T Econ 313 - Wissink - Fall 2005 ANSWERS...
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