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

This preview shows pages 1–4. Sign up to view the full content.

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

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
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
3) Read the attached article “Utility Buys Town It Choked, Lock, Stock and Blue Plume (New York Times, May 13, 2002). a)

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.