Homework 3 Answer Key

Homework 3 Answer Key - Economics 1480 Answer key#3 1 Rosen...

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Economics 1480 Answer key #3 1) Rosen Chapter 5: problem 11 MB = 10-X PMC = 5 MD = 2 (external cost) - Without government intervention, MB = PMC. So 10-X = 5 Æ X m = 5. - Social efficiency requires: MB = PMC + MD. So 10-X = 5+2 Æ X E = 3. -Efficiency gain of moving from X m to X E equals $2. See below: Set Pigouvian Tax = MD = 2. With this tax, producer internalizes externality and produces X E = 3. Thus, tax raises $2*3 = $6. PMC+MD PMC $7 $5 Efficiency gain= ½*base*height= ½(5-3)*(7-5)=2 Tax Revenue =2*3=6
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2) Read the attached article “A Tale of Two Fisheries” (New York Times, August 27, 2000). a) Let g(f) be the total value of fish(f) and let c denote the marginal effort required to catch an additional fish. Efficiency requires () M BM C o r gf c == . But if each fisherman independently decides how much effort to devote to fishing, they will do so until profits are exhausted: () cost m gf f c total benefit total = = Or () m m gf c f AB c = = b) Australia has a higher supply of fish because they have assigned property rights and have thus overcome the “tragedy of the commons”. Because they have a stake in the future of the industry, they conserve the number of fish. f efficient f market f $ C MB AB
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3) Read the attached article “Utility Buys Town It Choked, Lock, Stock and Blue Plume (New York Times, May 13, 2002). a)
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This note was uploaded on 07/22/2010 for the course ECON 1480 taught by Professor Knight during the Spring '10 term at Brown.

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Homework 3 Answer Key - Economics 1480 Answer key#3 1 Rosen...

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