1. John’s inverse demand function for a public good is P = 10 - Q. Paul’s invers

Question

1. John’s inverse demand function for a public good is P = 10 - Q. Paul’s inverse demand is exactly the same. The supply of the public good is P = Q. What is the equilibrium (efficient) quantity and price of the public good? Make a graph with the quantity in the horizontal axis and price in the vertical axis showing your answer.

2. Some services such as Airport security can be provided by the state or the private sector. Explain the general benefits and costs of using one or the other.

3. Explain concisely what the free rider problem is and what experiments show about how subjects behave in setting where they have to contribute to the provision of a common (or public) good.

4. In lecture 7 I showed a matrix with four entries depending on whether goods are rival or excludable. For the two entries different from Public goods and Private goods provide two examples of goods or services satisfying the corresponding conditions.

5. The Great Salt Lake in Utah is quite clean compared to the Mediterranean Sea in Europe. Take a look at both seas in a map and use the concept of externalities to explain why.

6. The government is interested in reducing the pollution generated at several factories. One problem is that it is unknown how easy or hard it is for these factories to achieve that goal (Their marginal cost of pollution reduction is uncertain) In this setting, is it better to use an emissions fee or cap and trade approach? Explain why. Assume also that the marginal benefit of pollution reduction is believed to be highly inelastic.

7. Two firms (X and Y) generate 20 units of pollution each. X has a Marginal cost of pollution reduction given by 2*q (q is the quantity of pollution reduction) and Y has 4*q. The government wants the total reduction in pollution to be 15 units. What emissions fee should it choose to achieve that goal? What is the tax bill for each firm?

Explanation / Answer

2. Some services such as Airport security can be provided by the state or the private sector. Explain the general benefits and costs of using one or the other.

Airport security can be provided by the state or the private sector. Benefits of government providing such services will be more control over security issues, more control over immigration and migration matters and also the cost maintenance, so that only optimal funds are being used in the airport security. On the other hand, using government services for airport security could mean more of government intervention in the airport issues, and thus inefficiencies on the part of the government as well as airport. Political interferance is something that airport authority has to seek.

Using private sector for airport security could mean more efficient use of airport of security. Also, there shall be quick decision making. There is offcourse no government internvention, so quick decison making when it comes to security issues. On the other hand, cost of using private security could be that some of the critical security issues government may not be able to control.

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