1. List two valuable aspects of our world that are not subject to scarcity:

Love, Spirituality

2. Consider the following generalized argument: "It is more likely that an unemployed 25 year old with no dependent children, mortgage, or professional career will risk growing pot than a 40 year old lawyer with a prosperous local practice, 3 young children, large mortgage, and political aspirations." Describe the fundamental economic principle that exists as a consequence of scarcity that can be employed to support this argument, and very briefly explain why:

The 40 year old has a much higher opportunity cost to growing pot because she loses a lot more if she is caught: Being disbarred and unable to practice law, losing her substantial lawyer income, destroying her political career, and impoverishing her children.

3. a. Which general category of ethical system evaluates the ethics of an action based on its intrinsic rightness, rather than on the anticipated outcomes or consequences of the action?

Deontological ethics

3. b. If a society has substantial diversity of values and so cannot find common ground upon which to determine the intrinsic rightness of an action, which ethical system provides a method for weighing the beneficial and harmful consequences of an action for each member of society, and then selecting an action based on its net social consequences?

Utilitarianism

4. Suppose that a cohesive group of people committed to the principles of Deep Ecology were to live apart from the rest of society on a self-sustaining and ecologically balanced organic farm. Name at least three aspects of their lives, interactions, and life-support that are "economic" in the sense that they involve scarcity and require an allocation choice?

5. It is sometimes asserted that the "economic" element of ecosystem and natural resource management decisions is restricted to the commercially valuable resources that can be extracted, the value of which is (i) determined from market processes and (ii) represents the opportunity cost of preservation and conservation. Briefly but succinctly refute this argument, explaining why the benefits of preservation and conservation, while non-commercial, are still "economic."

Economics is about how to allocate things that are scarce. Non-marketed aspects of the environment are valuable, scarce, and have an opportunity cost. Thus wilderness preservation has an economic value, as does commercial logging of that land.

6. If we were to apply the Pareto criterion to the proposal by the Bureau of Land Management to close Black Sands Beach (the southern entry point to the "Lost Coast" region near the town of Shelter Cove) to off-road vehicle use, which of the following must be true for this policy change to be efficient relative to the status quo (circle all that MUST be true):

a. The total utility gains to those made better off (hikers, backpackers, nature watchers, wilderness enthusiasts) must exceed the total utility losses to those made worse off (off-road vehicle users).

If the new policy is Pareto efficient relative to the status quo, it MUST be the case that the total "pie" is larger, i.e., the gains to those made better off exceed the losses to those made worse off. This way, the winners can compensate the losers.

b. Money or other resources are provided by those made better off so that off-road vehicle users are compensated for the lost off-road recreational utility.

This condition is also necessary for the new policy to be Pareto efficient relative to the status quo.

7. List at least 5 of the conditions required for the existence of a well-functioning competitive market. Do not include the words "efficient" or "equilibrium" in your answer:

Many buyers and sellers, each small in size relative to the overall market

No externalities

No cartels or collusion

Low transaction costs

Established and enforced ownership (property rights)

Existence of a market institution

Sellers produce very similar products

Buyers and sellers are well-informed of price, quality, availability, etc.

8. In what specific sense is a well-functioning competitive market in equilibrium efficient? Your answer should briefly address the sense in which efficient markets minimize waste of the benefits that buyers and sellers derive from their interaction:

The gains from trade are maximized. There are no shortages or surpluses. Efficiency here means that the waste of gains from trade or consumer + producer surplus is minimized.

9.a. Define a positive externality:

An unpaid-for benefit to members of society that occurs as a byproduct of an exchange, such as between buyers and sellers in markets.

9.b. Provide a clear example of a positive externality:

The benefits to society of parents immunizing their children, which reduces the likelihood of the spread of infectious disease.

9.c. Explain exactly why market systems underprovide goods that generate substantial positive externalities:

Since there are unpaid-for benefits, market demand only reflects the benefits or valuation to buyers, and thus understates the true social value of the good. Too little of the good generating the + externality is produced and consumed.

10.a. Define a negative externality:

An uncompensated cost borne by members of society as a byproduct of an exchange relationship, such as between buyers and sellers in a market.

10.b. Provide a clear example of a negative externality:

When firms avoid the private cost of cleanup or cleaner production by emitting air, land, or water pollution.

10.c. Explain exactly why market systems overprovide goods that generate substantial negative externalities:

When firms can freely pollute, they supply along their marginal private cost curve rather than the marginal social cost (private cost + external cost) curve. Thus market supply is artificially shifted to the right (overstated), leading to too much of the good produced that generates the negative externalities.

11. If supply is given by the expression P = 10 + 0.5Q, and demand is given by the expression P = 210 - 0.25Q, solve for each of the following in the context of a well-functioning competitive market in equilibrium (attach a sheet showing your work):

10+ .5Q = 210 - .25Q; Q = 266.67, P = $143.33

11.a. Price: $143.33 Quantity 266.67

11.b. Consumer surplus: 0.5*[210-143.33]*266.67 = $8889 Producer surplus: 0.5*[143.33-10]*266.67 = $17,778

12. If marginal external cost is $20 per unit of the good or service produced in question 11 above, and firms are allowed by society to pollute without regulation or penalty, then solve for each of the following in the context of a market equilibrium (attach a sheet showing your work):

w/o regulation, P = $143.33. W/ Pigouvian tax, Q is set where 30 + .5Q = 210 - .25Q; Q =240, P = $150.

12.a. Implicit price subsidy to consumers: P(social cost) - P(private cost) = 150 - 143.33 = $6.67

12.b. Total external cost = marginal external cost * Q(private cost) = $20 * 266.67 = $5333.34

12.c. Deadweight loss = 0.5*[Q(private cost) - Q(social cost)]*marginal external cost = 0.5*26.67*20 = $266.67