In Whoville, all residents live in identical apartments that are supplied by a c

Question

In Whoville, all residents live in identical apartments that are supplied by a competitive industry with an upward sloping supply curve (even in the long run). The housing market is depicted on the right below. As you can see, there are 10 apartments being rented, so there are 10 families in Whoville Pizzas in Whoville are supplied by a competitive constant cost industry with a long-run supply curve that is flat at $4. Each pizza sold creates a $2 externality, in the form of an empty pizza box being left on a park bench Price (S/month) Sipizza 10 100 $6 30 80 20 $4 10 11 12 13 141 Quantry Now suppose the town imposes a Pigou tax of S2 per pizza. You should assume the following All families have identical demand curves for pizza. All families are equally affeced by the externalities. . The revenue from the Pigou tax is paid to people who do not live in Whoville a) If you are a Whoville resident, are you happy or unhappy about the long-run b) In the long run, does the population of Whoville grow or shrink? By how much? In the long run, it is costless to move in or out of Whoville effects of the tax? Why?

Explanation / Answer

a. In the short run some residents of the ares may not like levying of taxes on pizza as this will increase the price of the pizza. But in the long run, people will appreciate the decision of the government. This is because levying of taxes will reduce the demand and thus promote cleanliness in the area as there will be reduction in the amount of empty boxes left on the park bench. This will reduce the effect of externality in the long run.

b. In the long run, the population of the area will increase due to decline in pollution level and increase in cleanliness in the area. It will increase by 0.5 per cent.

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