Chap005 - Part 2 Analysis of Public Expenditure Chapter 5...

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Part 2 – Analysis of Public Expenditure Chapter 5 - Externalities 1. Classical economics explicitly requires that all costs and benefits be taken into account when assessing the desirability of a given set of resources, so Gore’s statement is false. The notion that rescuing the environment should be “the central organizing principle for civilization” provides no practical basis for deciding what to do about automobile emissions (or any other environmental problem), because it provides no framework for evaluating the tradeoffs that inevitably must be made. 2. a. The number of parties per month that would be provided privately is P. b. See schedule MSB p. c. P*. Give a per-unit subsidy of $b per party. d. The total subsidy= abcd . “Society” comes out ahead by ghc , assuming the subsidy can be raised without any efficiency costs. (Cassanova’s friends gain gchd ; Cassanova loses chd but gains abcd , which is a subsidy cost to government.) 3. a. If you know who was cooking, the externality is easy to identify, and depending on how many students are involved, the costs of negotiation should be fairly small. b. It is unlikely that property rights could be enforced in terms of catching tropical fish on the Amazon River. The question states that hundreds of divers illegally catch these fish and sell them on the black market. If the property rights were
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Chap005 - Part 2 Analysis of Public Expenditure Chapter 5...

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