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Problem set 2 solutions

# Problem set 2 solutions - Econ 131 Problem Set 2 Solutions...

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Econ 131 Problem Set 2 – Solutions Chapter 4 Problems: Question 2: Imagine a rural area where neighbors are separated by a large distance, and each household’s rodent abatement does not impact the other’s, and the town will not “wipe out” the rodent population. The market would provide pest control until it is no longer efficient to do so. (If we were in town, then one person’s rodent abatement may provide their neighbor with less rodents, which could lead to the neighbor free-riding from their rodent abatement.) Another example that may be more cohesive: We might expect a tourist company that owns a piece of the pristine natural environment to ensure that its actions and customers would not damage the local environment if it is only the pristine environment that draws tourists. In order to keep bringing future business the company must keep its property undamaged. Chapter 5 Problems: Question 2: A perfectly flat MD curve will mean that the PMC and SMC curves are parallel. Imagine that the new SMC curve still passes through point (P*, Q*), but is just rotated slightly clockwise so that it is parallel to PMC. The new deadweight loss triangle will be slightly smaller. Question 4: The answer is no, due to the free-rider problem, that is discussed extensively in Chapter 5. The allocation of resources to charities reflects a private need to do “good” and does not reflect the social need. Some people may be “free riding” knowing that “good” is being done without their contribution. Question 5: The issue here is public goods and positive externalities, i.e.: An externality is a “direct, unintentional, and uncompensated effect”. When a person provides a public good (because her Marginal Benefits of providing that good exceed her Marginal Costs), others benefit from the good as well (because it is non-rival and non-excludable). This benefit, received by others can be characterized as a positive

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Problem set 2 solutions - Econ 131 Problem Set 2 Solutions...

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