Chapter 8:
- Suppose the government imposes a tax on heating oil.
- Would the deadweight loss from this tax likely be greater in the first year after it is imposed or in the fifth year? Explain.
- Would the revenue collected from this tax likely be greater in the first year after it is imposed or in the fifth year? Explain.
- The market for pizza is characterized by a downward sloping demand curve and an upward-sloping supply curve.
- Draw the competitive market equilibrium. Label the price, quantity, consumer surplus, and producer surplus. Is there any deadweight loss? Explain.
- Suppose that the government forces each pizzeria to pay a $1 tax on each pizza sold. Illustrate the effect of this tax on the pizza market, being sure to label the consumer surplus, producer surplus, government revenue, and deadweight loss. How does each area compare to the pre-tax case?
- If the tax were removed, pizza eaters and sellers would be better off, but the government would lose tax revenue. Suppose that consumers and producers voluntarily transferred some of their gains to the government. Could all parties (including the government) be better off than they were with a tax?
Chapter 10:
1.) There are three industrial firms in Happy Valley.
The government wants to reduce pollution to 60 units, so it has two options, it can use the market system or a command and control alternative. Since the government embraces economics, it pushes for tradeable permits but how they are used is debated. We have two alternatives to use the permits, give each firm 20 and make them reduce the rest (non-tradeable) or allow them to trade the permits and create a market for pollution permits.
Using intuition, which would businesses prefer? Why?
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| Firm | Buys or Sells | Initial Pollution Level | Permits after Trade | Remaining Pollution Reduction | Cost of Reducing Pollution by 1 Unit | Total Pollution Reduction Cost |
| (Dollars) | (Dollars) | |||||
| A | (buys/sells/neither) | 30 | 20 | |||
| B | (buys/sells/neither) | 40 | 30 | |||
| C | (buys/sells/neither | 20 | 10 | |||
| Total | X | X |
If permits could not be traded, firm A would have to remove _____ units of pollution at a total cost of $_____, firm B would have to remove _____ units of pollution at a total cost of $_____, and firm C would have to remove ______ units of pollution at a total cost of $_____. The overall cost of reducing pollution in this case is $______, which is (lower/higher) than with tradable permits.
2.) Ringo loves playing rock ‘n’ roll music at high volume. Luciano loves opera and hates rock ‘n’ roll. Unfortunately, they are next-door neighbors in an apartment building with paper-thin walls.
a. What is the externality here?
b. What command-and-control policy might the landlord impose? Could such a policy lead to an inefficient outcome?
c. Suppose the landlord lets the tenants do whatever they want. According to the Coase theorem, how might Ringo and Luciano reach an efficient outcome on their own? What might prevent them from reaching an efficient outcome?
| Steven | Peter | James |
| $7 | $5 | $3 |
| 6 | 4 | 2 |
| 5 | 3 | 1 |
| 4 | 2 | 0 |
| 3 | 1 | 0 |
Chapter 11:
Four roommates are planning to spend the weekend in their dorm room watching old movies, and they are debating how many to watch. Here is their willingness to pay for each film:
- Suppose they agree in advance to choose the efficient number and to split the cost of the movies equally. When Steven is asked his willingness to pay, will he have an incentive to tell the truth? If so, why? If not, what will he be tempted to say?
- What does this example teach you about the optimal provision of public goods?
