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Unformatted text preview: Econ 301 Intermediate Microeconomics Prof. Marek Weretka Solutions to problem set 12 (due Tuesday, May 8st, before class) Problem 1 (Externality) a) Positive: Participation in a cellular network R&D by Google Negative Neighbor singing in the bathroom Too many cars in NYC (congestion) b) Without regulation the outcome is likely to be Pareto ine cient. In case of positive externality in market interactions we will observe too little activity, as the positive e/ect on others utilityprot is not internalized. In case of negative externality we observe too much activity. c) In case of positive externality one could introduce a subsidy encouraging the action, while in case of negative one we could tax the activity. Problem 2 (Positive externality) a) Positive b) Given the price of dynamite is equal to one, a prot function of the dynamite producer is given by & d = d & TC d ( d; x ) The two secrets of happiness (rst order conditions) are given by @& d @d = 1 & @TC d ( d; x ) @d = 0 @& d @x = & @TC d ( d; x ) @x = 0 hence @TC d ( d; x ) @d = 1 ) d = 1 & @TC d ( d; x ) @x = ) x = 2 The rst condition implies that the optimal level of dynamite production is @TC d ( d; x ) @d = 1 and the optimal level of intensity is & @TC d ( d; x ) @x = & 2 ( x & 2) = 0 ) x = 2 The maximal level of prot is & d = d & TC d ( d; x ) = 1 & 1 2 = 1 2 c) The marginal benet is given by...
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- Spring '08