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Old Midterm ExamsNote: Answers are provided below each question, and are written in italics. -SH Please provide short, succinct answers. You should be able to answer the question in the space provided. Think before you write. Quantity is not a substitute for quality. Good luck.
How to allocate scarce resources, goods, and services amongst competing
ends 2. What is the role of values in the resolution of the
economic problem? [10 points] Values are necessary in order to rank alternatives and make a 'good' or 'efficient' allocation choice 3. With regard to utilitarianism, categorize and very
briefly summarize the shortcomings of this ethical system as it
pertains to social policy. [10 points] Tyranny of the majority: By summing the benefits and costs
of a social policy it is possible for policies to be deemed utilitarian-ethical
and yet impose substantial harms on a minority in society Measurement: It is not possible to make interpersonal utility comparisons, and using money as a proxy leads to problems such as monetizing spiritual and other intangible values, and the implicit assumption that a dollar yields the same benefits to both rich and poor alike. 4. Describe an ethical system that serves as an alternative
to teleology and utilitarianism, and very briefly summarize the
shortcomings of this alternative system as it pertains to social
policy. [10 points] The various forms of deontological ethics serve as an alternative to utilitarianism. Yet as a guide to social policy, deontological ethical systems have the shortcoming of trying to establish a universal system of intrinsic rightness in societies composed of individuals with widely different value systems. 5. List and briefly describe the necessary conditions
for the existence of a well-functioning competitive market. Your
answer should not contain the words efficient or equilibrium.
[10 points] Many buyers and sellers, each of whom is small in size relative to the overall market The lack of monopolies or collusive arrangements amongst sellers (or buyers) The establishment and enforcement of property rights Low transaction costs The lack of substantial external benefits or costs Easy, low-cost entry and exit to and from the market
Buyers and sellers that are fully informed of quality, price, production
methods, location, and availability 6. List and briefly describe the five rights that, when
combined, form the bundle of rights usually referred to as ownership
or private property. [15 points] Access: Authorized entrants in places like national parks have the right to use (but not harvest) a resource Withdrawal: Authorized users such as those who hold valid fishing licenses have the right to both access a resource and withdraw resource units (harvest fish) Management: Claimants such as farmers on government-owned irrigation systems have the rights of access and withdrawal, as well as the right to manage the use, maintenance, and monitoring of a resource Exclusion: Proprietors such as members of condominium associations have the rights of access, withdrawal, and management, as well as the right to determine (collectively) the rules governing who can and cannot use the resource (such as a swimming pool or rec room owned by the association) Alienation: Owners such as homeowners have all the above-named rights as well as the right to sell the resource 7. Suppose that there is an otherwise well-functioning
competitive market that features substantial unresolved positive
externalities. Describe precisely how the equilibrium of this market
is inefficient, and describe some policies that could serve as efficient
government intervention in this market. Provide one concrete example
(this example need not be argued extensively). [15 points] When there are positive externalities in a pure market system of allocation and exchange, unpaid-for benefits are being generated as a consequence of exchange. For example, others in my neighborhood receive benefits from my beautification of my house and yard. Yet in a pure market context the amount of home improvement I choose depends only on my own willingness-to-pay, and thus ignores the benefits enjoyed by my neighbors. As a consequence market demand does not include the benefits generated as positive externalities, and so in general an inefficiently small amount of home improvement will be generated by the market process (market demand reflects private and not social benefits). A common government intervention in this sort of market failure is to subsidize the activity underprovided by the market, such as through tax deductions or credits for home improvements. An even better example is given by vaccinations or child education. 8. Suppose that competitive market supply is given by
the expression P = 10 + 0.5Q, while market demand is given by the
expression P = 110 - 0.75Q, where P is price and Q is the quantity
of the good or service produced and exchanged in the market (both
prices are in dollars). In addition, suppose that marginal external
cost is $10.00 per unit produced. [20 points] a. Compute the competitive
market equilibrium P and Q in the absence of Pigouvian taxes or
other pollution-control regulation of this market. Show your work. Equilibrium Q is found by finding the equilibrium market price at which quantity demanded (Q in the demand expression) equals quantity supplied (Q in the private-cost supply expression). This occurs when the private-cost supply expression is set equal to the demand expression: 110 - .75Q = 10 + .5Q; 1.25Q = 100; Q = 80; P = 10 + .5(80) = 50 b. Compute the competitive market equilibrium P and Q when a Pigouvian tax is imposed on producers. Show your work.
Equilibrium Q is found by finding the equilibrium market price at which quantity demanded (Q in the demand expression) equals quantity supplied (Q in the social-cost supply expression). The social-cost supply expression is found by adding marginal external cost ($10) to the private-cost supply expression: Social-cost supply = marginal external cost + Private-cost supply = 10 + 10 + .5Q = 20 + .5Q Thus as before, equilibrium Q is found where the social-cost supply expression is set equal to the demand expression: 110 - .75Q = 20 + .5Q; 1.25Q = 90; Q = 72; P = 20 + .5(72) = 56 c. Describe precisely how the competitive market equilibrium
P and Q you described in 8.a. above is inefficient. Your answer
should include a computation of the amount of implicit price subsidy.
Show your work. Q (private cost) is excessively large, and P(private cost) is too low, since both ignore external costs. Specifically, the implicit price subsidy that occurs when we do not intervene in this market, which features significant negative externalties, is P(social cost) - P(private cost) = $6
EXTRA CREDIT -- worth 5 extra credit points: Compute the amount
of deadweight loss in problem 8 above. Show your work. The height of the deadweight loss triangle is $10, and the base is 8. You can show using the formula for computing right triangles that the deadweight loss is $40. |