ECON 111 - Problem Set 4 Answers

# ECON 111 - Problem Set 4 Answers - Problem Set#4 Answers...

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Problem Set #4 –Answers 1) (12 pts) Externalities : a) (5 pts) What type of externality does the graph below represent? Using the letters provided calculate social welfare under the market outcome and the socially optimal outcome. Describe and show the deadweight loss. (Hint: The producer surplus for the socially optimal outcome will have a bow-tie with a positive and negative portion.) Market Social Optimal Consumer => B B+D+E+F Surplus Producer => D+G G-E-F-H (Bow-Tie) Surplus Externality => A _____ A+C+H _____ Social Welfare => A+B+D+G A+B+C+D+G Deadweight loss C b) (7pts) Read the article I posted on Blackboard regarding tradable gasoline rights (TGR) and answer the following questions: 1) (3 pts) Describe how the TGR system would function. The government would set a cap. In other words, the government would decide the maximum amount of gallons of gasoline that could be consumed each year and would distribute that total amount in the form of Tradable Gas Rights (TGRs). Each adult

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would receive a TGR debit card that would require using one tradeable gasoline right for each gallon of gas that was purchased. The TGRs would be distributed to reflect geographic differences in driving patterns and would be tradable among individuals. 2) (4 pts) Why is the TGR system superior to the government imposing gas standards or gas taxes. Simply stated it is more efficient. It achieves the same goal but at a lower cost and gives everyone the incentive to conserve. First, it gives people who receive a low marginal value from gasoline consumption an opportunity to make profit by selling their TGRs to people that receive a high marginal value from gasoline consumption. Second, if people want to consume more gas than they were provided by the TGR distribution, they will have to buy the right. This places an additional cost that is set by the supply and demand of TRG. The additional cost encourages consumers to reduce their consumption of gasoline. Third, it achieves the goal of halting US growth in gasoline consumption whereby a tax would not necessarily achieve this goal. If a gas tax is set too low, then it is possible that an increase in gasoline demand cause by say an increase in population, incomes, or tastes may overcome the reduction in consumption that the tax would cause. Lastly, the fuel efficiency standards set by the government only apply to new vehicles. Since most cars on the road are not brand new the fuel efficiency laws will have little affect on overall gas consumption and the environment. 2) (10 pts) Public Goods : Categorize whether the following goods are private goods, public goods, common resources or a natural monopoly and explain why.
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