PS5_E1_Sp03 - Problem Set#5 Bruce Brown Economics...

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Problem Set #5 Bruce Brown, Economics 1 (Microeconomic Principles), SMC 1) What characteristic of a good causes, or “is responsible for,” the free rider problem (see Fig. 1-1 on page 227)? 2) Describe how the properties of excludability and rivalry define differences between private goods, public goods, common resources, and goods produced in “natural monopoly” markets? 3) How could a private firm build and operate a lighthouse for profit? Who would the firm charge and why? Would a private firm be more successful building a lighthouse next to a shipping lane where all ships went to the same port, or next to a shipping lane used by ships going to many different ports? What “good” is being provided by the company which operates the lighthouse. 4) What characteristics subject a good to the problems described in the section on “the tragedy of the commons” (page 234)? 5) Assume each ton of iron produced makes 20 pounds of “muck,” and this can not be reduced. If the external cost of muck is $2 per pound, how much (per pound of muck) should government charge the firm to eliminate inefficiency of this negative production externality? If the tons of iron output can be measured, but not the amount of muck created, what can government do? How would we show this with a graph?
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