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# 1 - Quotas & Taxes to Limit Negative Externalities - There are two companies that make sparking chandeliers that operate next to Crystal Lake. However, both companies dump gloop into the lake as part of their manufacturing process. The supply curves for both companies are shown to the right. Use this information to answer the following questions.
A. If the market price is $5, how many sparking chandeliers are manufactured for the market?
B. Government scientists have determined that the maximum amount of gloop that can be dumped into Crystal Lake is the amount of gloop produced when manufacturing 20 sparking chandeliers. In order to protect the lake, the government says that both companies can only produce 10 sparking chandeliers. What effect will this quota have on the production of sparking chandeliers? What might be the problem with the government's policy?
# 2 - Market for Pollution Permits - Consider the chart shown to the right that shows three companies that dump pollution into Lake Springfield. The government would like to reduce the amount of pollution dumped into Lake Springfield to 6 tons. Currently the government of Springfield is weighing the options of two programs to clean up the lake. The chart shows the total amount dumped by each company and the cost for each company install the equipment to clean up its pollution.
A. In the first program, the government will pass a law that allows each company to only dump 2 tons of pollution into Lake Springfield. What would be the cost of this law on the businesses of Springfield?
B. In the second program, the government sets up a pollution trading system that limited the amount of pollution to 6 tons and issues each company 2 permits (each permit allows the company to dump one ton of pollution into the lake). In this situation, how much will it cost the businesses to reduce their pollution? In your answer, explain how permits will be traded and how that affects the cost to businesses. Important, count any revenues companies gain from selling their permits against the cost to businesses.
C. Which program do you think the town of Springfield should adopt? In your answer consider the economic efficiency of each program and how well each works in establishing incentives and punishments.
D. Local environmental activist, Lisa Simpson, is outraged that the government is willing to tolerate any pollution and vows to protest the adoption of either program. How could you explain to her that the two programs are not the same and that she could use one to eliminate all pollution?
# 3 - Natural Monopoly - The Sparky Electric Company is the only company supplying electricity to the people of Sunshine Valley. The equations shown below are the supply curve for the Sparky Electric Company (reflects the cost of supplying electricity to each house in the valley) and the demand curve for each house in the valley.
A. Currently, Sparky Electric is charging each house $ 12 a unit for electricity. How much is each house overpaying for electricity?
The government of Sunshine Valley is considering permitting the Voltage Electric Company to compete against Sparky Electric to supply electricity to Sunshine Valley. The equations shown to the right show the supply curves for the Sparky Electric (SSE) and Voltage Electric (SVE) (reflects the cost of supplying electricity to each house in the valley) and the demand curve for each house in the valley.
B. What would affect would competition from Voltage Electric have on the market for electricity in Sunshine Valley?
C. Why would it be more efficient for the government of Sunshine Valley to regulate the price of electricity in Sunshine Valley than to permit the competition between these two companies. (Assume the government knows Sparky Electric’s Supply Curve
# 4 - Problem # 3 - Government Subsidy to Create a Positive Externality - Four hundred and fifty people live on the island on Bedlam island. The government of the island is trying to prevent an epidemic of Shenaniganisis. Fortunately there is a vaccine for Shenaniganisis. The equations to the right show the supply and demand equations for the vaccine for Shenaniganisis.
A. What is the current market equilibrium price and quantity for the vaccine for Shenaniganisis?
B. In economics, the term "fixed cost" describes the cost a company has to pay even when it produces an output of zero. Fixed cost are the cost involved in developing a product and setting up production. What is the fixed cost for making the vaccine for Shenaniganisis? How are fixed costs a problem in the market for the vaccine for Shenaniganisis?
C. Suppose the government of Bedlam island offers to pay the fixed cost for the production of the vaccine for Shenaniganisis, what would equilibrium market price and quantity for the vaccine?
D. Epidemiologists say that a population can achieve hear immunity to Shenaniganisis if 80% of the island is vaccinated. Does the government policy mean this goal can be achieved? How is the government policy creating a positive externality?
Problem # 4 - Setting a Congestion Price for Traffic - The main highway into city of Palookaville suffers from terrible road congestion. The highway was build to handle a capacity of 6900 cars a day travelling at full speed. The Demand Curve for driving on the main highway is shown to the right. It is free to drive on the highway.
A. How many more cars are driving on the road than the road's capacity? How is traffic a negative externality?
B. What is the amount of a road congestion tax that would bring the car volume down to the road's carrying capacity?
C. How much money would the road congestion tax raise?
Problem # 6 - Setting a Subsidy to Support a Public Good - The equations to the right show the daily demand for rides on the mass transit system in Palookaville and the supply curve showing the cost of providing the mass transit system.
A. What is the current price of riding on the Palookaville mass transit system and how many people ride on it?
B. The congestion tax has removed 1500 drivers from the Palookaville highway. How much of a subsidy does the government of Palookaville have to offer riders on the mass transit system to make sure that the 1500 drivers can still get into the city each day?
C. Was the money raised by the road congestion tax enough to pay for the cost of the subsidy to the mass transit system?
D. Consider a person who paid to ride the mass transit system before the subsidy. How has the subsidy benefited them?
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