The graph below shows the car alarms market in which there is some kind of externality. SMB in figure stands for social marginal benefit.
economics
Description
Econ 107: Principles of
Microeconomics Spring 2020
Homework 2
Topic: Externalities and Public Goods
(Ch 5)
Q1 [36 pts]: Externalities
and Solutions (that can work and not)
a.
(5 pts) What kind of externality is present in the car
alarm market according to the figure; negative or positive?
Briefly explain and give an example of such an externality that can be
associated with car alarms.
b.
(6 pts) Determine the socially efficient output level.
What is the maximum level of total welfare attainable in this market? Shade the
area (or equivalently, use the letters provided to state the area).
c.
(6 pts) Determine the output of the free market. What
is the level of total welfare associated with the free market equilibrium? Shade
the area.
d.
(2 pts) What is the DWL that arises at the free market
equilibrium in this market? Shade the area.
e.
(5 pts) Why do economists use the word external to
describe third-party effects that are harmful or beneficial?
f.
(6 pts) Suppose a per unit subsidy is given to
producers. What is the amount of per unit subsidy that can attain the maximum
total welfare in this market? Show the effects of this subsidy on the graph and
explain.
g.
(6 pts) Suppose that as an alternative government
decides to provide the good itself and offers the good to the public at the
price of zero. Whatever is demanded at zero price is provided. What would be
the outcome of this policy? Would it achieve maximum social welfare or not? If
you are answering no, then you have to prove your result by showing the welfare
loss by shading the relevant area (or state the area).[1]
In
doing so assume that government’s production costs are no different than that
of private producers: This will ensure that the production costs depicted by
the supply curve is still relevant. And no private firm provides the good.
Q2 [14 pts]: Pure
Public Goods and the Free Rider Problem
Chickenpox and polio; once debilitating and deadly
diseases, are not a big threat due to widespread immunization today. While
immunization prevents children from getting sick with diseases that they are
immunized for, in recent years some parents started to become concerned about
the potential long-term effects of these immunizations and decided not to
immunize their children.
a.
(7 pts) Explain how the decision by parents to not
immunize their children, hoping that their children will not get sick because
other parents have had their children immunized, is an example of free riding.
b.
(7 pts) Free riding is a problem that we experience
with pure public goods. Seems like public health; especially when you have
contagious diseases, have a public good nature. Explain this by referring the
properties of pure public goods.
[1] Today, our government is
providing the face masks for free; and I believe this policy is efficient. In
the question you are working on free provision of the good is not efficient
(Ups, I have given away a hint here, silly me). It might be fun to try and draw
a figure where free provision really helps. Only if you want, not as a part of
homework.
