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Main Point - Under some condition markets can create economic problems and the government can be the solution.
Main Point - Under some condition markets can create economic problems and the government can be the solution.
Homework # 1 - A look at Look at Market Failure
Homework # 1 - A look at Look at Market Failure
Article - Market Failure is Hard to Explain - click here
Article - An Econ Question We Shouldn't Get Wrong - click here
Article - A Carbon Tax America Could Live With - click here
Article - Why Health Care Policy is So Hard - click here
Printable Copy of Assignment - click here
Homework # 2 - Market Failure & Role of Government
Homework # 2 - Market Failure & Role of Government
Reading - Market Failure - click here
Video - Public Goods and Asteroid Defense - click here
Video - Market Failure and the Role of Government - click here
Video - How the Government Addresses Market Failure in the Insurance Market - click here
Classwork - Problems with Market Failure
Classwork - Problems with Market Failure
Reading - Market Failure & Health Care - click here
Buy Coal Mines! - click here
Problem # 1 - Types of Economic Goods - Consider the goods provided by local governments (such as the Town of Bedford) and classify them according to excludability and rivalry. Should these goods be provided by the government based on the concept of market failure?
A. Police protection in a town
B. Roads
C. Trash Collection.
D. Public health programs
E. Public parks and sports fields
F. Public Education
Problem # 2 - Coase Theorem - Frank’s manure farm is located next to Fran’s restaurant in Sunshine Valley. Currently, Frank makes $200 in profits from running his farm. Fran would have $300 in profits if her restaurant was not affected by the manure farm. However, as could be expected, because of the manure farm, her profits are zero.
A. How is the air a common resource? How is the manure farm a case of a negative externality?
B. How would Frank and Fran solve this problem if Frank has the right to pollute the air?
C. How would the problem be solved if Fran had the right to clean air?
D. What would be the outcome if Frank’s manure farm had profits of $400 and Fran had the right to clean air?
Problem # 3 - 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 listed 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?
C. The government decides to impose a tax on each sparking chandeliers that is sold. How much should the tax be to limit the market to 20 sparking chandeliers? Why is this a better policy?
Link to Video Answer for this Problem - click here
Problem # 4 - Consider the chart 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?
Link to Answer for this Problem - click here
Link to Video Answer for this Problem - click here
Problem # 5 - Natural Monopoly - The Sparky Electric Company is the only company supplying electricity to the people of Sunshine Valley. The equations to the right 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?
B. 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 to the right show 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. 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)
Link to Video Answer for this Problem - click here
Printable Copy of Assignment - click here
Problem # 1 - Cletus Spuckler is suddenly afforded the opportunity to move out of his shack because of the discovery of a large reserve of natural gas on his property. He fully expects to earn $1 million by leasing the rights to drill for the gas. However, the drilling rigs that will be put up to extract the gas will disturb Montgomery Burn’s view of Pristine Valley, which he values at $1.5 million.
A. Use the Coase Theorem to explain how this conflict will be resolved.
B. Suppose the price of natural gas goes up and Cletus could now earn $2 million from leasing the rights to drill for gas. Will this change the outcome?
C. Now consider Bart Simpson, a third party who personally gains nothing from any deal worked out between Cletus Spuckler and Montgomery Burns, and whose basic outlook could be described as, "I just want to buy gas, man." Does it matter to Bart who owns the property rights to the land with natural gas in terms of the outcome of the conflict? Explain your answer.
Problem # 2 – The Sunshine Valley Bed & Breakfast currently has two noise problems. The owner of the Sunshine Valley Bed & Breakfast estimates that these problems cost it $10,000 a month in profits.
The first problem is that it is that the roosters at the Spring Chicken Egg Farm wake up guests at the Bed & Breakfast every five minutes every morning. This problem costs the Bed & Breakfast $4000 a month because guests do not want to stay in the rooms facing the Egg Farm. The owner of the Egg Farm says that while the roosters are not necessary to the business, he values them at $3000.
The second problem is the on-line retailer Congo has fulfillment warehouse five miles away on the same road as the Bed & Breakfast. The large trucks driving down the road in the early morning wake up guests at the Bed & Breakfast. The owner of the Bed & Breakfast estimates that this cost the Bed & Breakfast $6000 a month. The manager at Congo fulfillment warehouse estimates that it would cost $5000 to send the trucks by an alternative route, but that he cannot change the trucks’ routes without permission from the executives at Congo’s headquarters.
A. Which problem can be solved using the Coase Theorem? Explain why.
B. Which problem cannot be solved by the Coase Theorem? Explain why.
Problem # 3 - The people of Sunshine Valley love barbeque. Unfortunately, the three barbeque restaurants in town create a lot of air pollution. The pollution is based on the quantity barbeque produced. The supply curves of each company is shown below. Use this information to answer the following questions:
A. The current market price for barbeque is $7. How much barbeque is produced in Sunshine Valley?
B. The people of Sunshine Valley are upset that the air pollution is blocking out the sun. They want the government to act. A scientific study says that the sun will shine clearly if the amount of barbeque produced is reduced by 280. The government decides to be fair and orders each company to cut the amount of barbeque it produces by 93. Why is this policy not fair and why won’t it work?
C. As the local economist, you are asked to calculate the amount of tax needed to reduce pollution that will reduce the amount of barbeque by 280. What amount of tax would reach that goal? (assume the price paid by customers will stay at $7)
Problem # 4 - Sunshine Valley also has four farms. These farms use phosphate fertilizers that pollute the Sparkling River that runs through the valley. A scientific study says that this pollution has to be reduced to 20 units of pollution. The government is trying to decide between two policy options.
A. The first policy option is to limit each farm to producing only 5 units of pollution. They would have to pay to clean up any additional pollution. What will be the total cost of this policy?
B. The second policy option is to give each farm 5 pollution permits and allow them to trade these permits. What would be the price at which these permits would be traded? Explain how you got this number.
C. Based on your answer to the previous question, what would be the cost for each farm to clean up its pollution and what will be the total cost of this policy?
D. Which farms prefer the second policy (pollution permits) over the first policy (limit on pollution)? Why?
Homework # 4 - Public Goods & Public Choice Theory
Homework # 4 - Public Goods & Public Choice Theory
Reading - Government Failure & Public Choice - click here
Video - What are Institutions - click here
Classwork # 4 - Government Supply of Public Goods
Classwork # 4 - Government Supply of Public Goods
Problem # 1 - The town of Bloopopolis (population 10,000) is worried about an epidemic of cooties striking the town this summer. It is estimated that an epidemic of cooties would cost Bloopopolis $90,000 in lost economic activity (due to the need to quarantine). Fortunately, there is a cooties inoculation that only cost $10 for the citizens of Bloopopolis. Answer the following question about how Bloopopolis should prevent the cooties epidemic.
A. The average citizen of Bloopopolis could expect to lose $ 9 if they come down with a case of the cooties (due to lost wages while sick). Will the people of Bloopopolis get the shot to protect them against cooties?
B. It would cost the town of Bloopopolis $20,000 to run a public health program to give the people of Bloopopolis shots to protect them against cooties? Should the town do this?
C. The town could also pay doctors a subsidy for every cooties shot they give to a citizen of Bloopopolis. How much should the town subsidize each shot?
Problem # 2 - Optimal Size of Public Goods - The chart to the right shows four different flood control programs for a city. Which project should the city undertake? Why?
Problem # 2 - Voting and Public Goods - Consider a society made up of three people (Huey, Dewy & Lewy) who decide everything by majority vote. The society has the choice to engage in a project that will bring benefits of $1150 to the whole society, but will cost in total $900. The cost of the project will be paid equally by all three people in society – everyone will pay $300. However, the benefits will not be spread evenly, Huey will benefit by $700, Dewy will benefit by $250, and Lewy will benefit by $200.
A. Is this project economically efficient?
B. Will this society engage in this project if the decision is made by majority vote?
C. How could Huey make sure that they the vote would support the project?
Problem # 4 - Setting a Congestion Price on a Public Good - 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. 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?
Link to Video Answer for this Problem - click here
Problem # 5 - 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?
Link to Video Answer for this Problem - click here
Printable Copy of Homework - click here
Problem # 1 - Traffic Congestion in Bumperville - The town of Bumperville has traffic problems twice a day at rush hour (hours of 8-9 and 5-6) on its main road, named “The Magnificent Street”, because there are too many cars on the road. The town has done a traffic study and is considering several options. The traffic study of The Magnificent Street has determined the costs and benefits (in millions of dollars a year) of several policy solutions. The results of this study are shown to the right.
A. would be the best option for the town to follow? Explain.
B. The traffic study conducted a survey that determined how much the different types of drivers who use The Magnificent Street during rush hour would be willing to pay to use the street during that rush hour. Assume that there are equal numbers of each type of driver on the road at this time and that reducing the traffic congestion by a third would solve the traffic problem. Based on the survey results shown to the right, how much of a congestion tax would be needed to solve the traffic problem?
C. How would this be an example of a Pigovian tax?
D. The decision about the tax will be decided by a vote of the residents of Bumperville. The residents of Bumperville do not like the congestion tax because they see it as excluding them from the roads they pay for with their property taxes. How might the political reality that only the residents vote on the congestion tax result in an economically inefficient outcome?
E. A group of citizens in Bumperville have organized a group opposed to any congestion tax called They’re Our Roads! They argue that they are already paying property taxes for the roads and it is absurd for them to pay more. How would you explain to the residents of Bumperville that the congestion tax could be beneficial to them?
Problem # 2 - Busy City Park - Busy City Park is in the center of Busy City. Everyday, people who work in the offices surrounding the park go to the park to eat their lunches. It is free for anyone to enjoy the park. However, the people eating lunch in the park has created a trash problem in the park. Assume that the amount of cleaning the park needs is equal to the number of people who eat lunch in the park. The equations to the right show the demand curve for people eating lunch in the park and the supply curve for cleaning up the trash in the park.
A. Currently, it is free for people to use the park. How many people are eating lunch in the park? How much does it cost to clean the park? How does this create a negative externality?
B. The Busy City government wants to make the people who eat lunch in the park to pay for the cleaning of the park. How much does Busy City need to charge people eating lunch in the park to pay for the cleaning of the park?
When the Busy City government announces that it is charging people to eat lunch in the park, many office workers complain that the policy is unfair. In addition, it is hard to collect the money because it is easy for office workers to evade city workers sent to collect the fee for eating lunch.
The Busy City government gives up on the policy of charging people to eat lunch in the park and instead looks at a policy for charging food trucks selling food in the park. The equations to the right show the demand by food trucks wanting parking space in the park and the supply curve of available parking options.
C. Currently, it is free for food trucks to park and sell food in the Busy City Park? How many trucks are parking in the park and how does this create a shortage?
D. How much should the Busy City government charge to resolve the parking problem for the food trucks?
E. How much will the policy of charging the food trucks to park raise for the Busy City Government? Why would it be a good policy to use this money to pay for the cleaning of the park?
F. Why is the policy of charging the food trucks for parking better than the one of charging people to eat lunch in the park?
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