sifters. The process includes the melting of metals and chemicals which give the

Question

sifters. The process includes the melting of metals and chemicals

which give the sifters strength. In the production process, waste is

produced and released into the river that runs alongside of the plant.

students to attend certain universities within the state tuition free

if they are a resident of that state. As a result of this policy, the

state%u2019s population is more educated and more productive in the

workplace than many other states.

subdivision with several residents. The subdivision has one short dirt

road that provides access to all the homes. Bob, one of the residents

of the subdivision, just inherited a large sum of money and decides to

have the road in the subdivision paved. After the paving, Bob asked the

other residents to pay their fair share of the costs for the paving,

but they all refused.

United States has determined that the cost associated with national

defense has become too expensive. In an effort to reduce costs and

balance the budget, the President has asked the public to voluntarily

pay for their fair share of the costs associated with national defense.

One of his advisors insists that this would not work, another advisor

thinks it%u2019s good policy. Which advisor is correct?

For each of the situations above, identify the type(s) of market failure that has occurred. For each situation, explain why or how the failures came about and describe the possible remedies or solutions. Explain your answers and use graphs or diagrams to justify your answers.

Explanation / Answer

The above answer reported regarding the externalities is correct. The remedy that can be suggested in Situation 1 is that the cement firm should be given a limit upto which it can discharge its waste in the river. If it discharges more, then it should be taxed. The tax money should then be distributed among the residents of the village living beside the river so that they are able to clean the river using that money.

In Situation 3, Bob should have asked his fellow neighbours first before having the road paved. Since it is a public good which has been created, none of the residents will pay for it now. He should have had a voting done before making the decission and based on the voting results he should have decided upon individual contribution.

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