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Exam#2 problem set

# Exam#2 problem set - ECON 200 Problem Set 5 1 In lecture we...

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ECON 200 Problem Set 5 1. In lecture, we focused on harmful externalities that arise in the production of goods. Some externalities, however, are beneficial and some arise from the consumption of a good instead of the production of a good. Consider, for example, flu shots. If you get a flu shot the chances that I will get the flu are reduced, and consequently the social value of a flu shot is higher than the private value of a flu shot. (a) In a diagram, show the efficient number of flu shots and the number of flu shots produced and consumed in a competitive market. Which is greater? (b) In a diagram, show the deadweight loss from this externality. (c) Show that the government could lead people to consume the efficient number of flu shots level by subsidizing the consumption of flu shots. 3. Jones and Smith are neighbors. Jones loves his dog very much but the dog barks a great deal and annoys Smith. Jones receives \$100 of benefits from his dog and Smith suffers \$60 of damages from the barking. (a) From an efficiency perspective, should Jones be allowed to keep his dog? (b) Suppose the town where Jones and Smith live does not have an ordinance against dogs. Jones and Smith can bargain at zero cost. Will they reach an agreement where Jones gives up his dog? (c) Now suppose the town passes an ordinance that says that dogs are banned if someone in the neighborhood objects to a dog. As before, Jones and Smith can bargain at zero cost. Will Jones be allowed to keep his dog? Problem Set 6 1. A three-person city is considering a fireworks display. Bertha is willing to pay \$100 to see the fireworks, Marian is willing to pay \$30, and Sam is willing to pay \$30. The cost of the fireworks is \$120. (a) In terms of efficiency, should the fireworks display be offered? (b) Will any single citizen provide the display on his or her own?

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(c) Suppose the town decides to put the matter to a vote. If at least two people vote in favor of the fireworks display, each person will be taxed \$40 and the fireworks display will be held. How many
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Exam#2 problem set - ECON 200 Problem Set 5 1 In lecture we...

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