PS12 - Econ 301 Intermediate Microeconomics Prof. Marek...

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Econ 301 Intermediate Microeconomics Prof. Marek Weretka Problem set 12 (due Tuesday, May 8st, before class) Problem 1 (Externality) a) Give four examples of market interactions with externalities: two positive and two negative ones. b) In each of your examples is the outcome Pareto e¢ cient or not? Why or why not.(you can answer this question assuming that market is not regulated) c) In each case explain how possibly we could change incentives of the agents so that they are closer to socially optimal outcome? Problem 2 (Positive externality) In this problem we study market interactions with positive externalities. We consider a plant that manu- factures dynamite d and a nearby farm producing tomatoes t . The cost of production of dynamite is TC d ( d; x ) = 1 2 d 2 + ( x 2) 2 where d is the amount of dynamite produced and x is the intensity of use of a nitrogen in the production process. The side product associated with use of the nitrogen is ammonia - a fertilizer that is released to the air. Such fertilizer promotes growth of tomatoes making the production on the farm cheaper. In particular the higher the intensity x
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This note was uploaded on 06/04/2011 for the course ECON 301 taught by Professor Hansen during the Spring '08 term at Wisconsin.

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PS12 - Econ 301 Intermediate Microeconomics Prof. Marek...

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