Chapter 4: Questions from textbook (these are analytical type and short answer questions)

Q3. Following are portions of the demand curves of three individuals for the water quality in a small pond. The water quality is expressed in terms of the parts per million (ppm) of dissolved oxygen (DO). Water quality improves at higher DO levels. The demand curves show the marginal willingness to pay of each individual (A, B, C). Note that to go from 0 to 1 ppm DO, A’s MWTP

is $10.

a. Complete the table. Find the aggregate marginal willingness-to-pay curve of these three people at each DO level.

b. If the actual marginal cost of increasing DO is $12 at all levels, what is the socially efficient level of DO in the lake, assuming these three people are the only ones involved?

Q5. Consider the example of the three homeowners around the lake (the ones depicted in Table 4.2). Suppose the lake was cleaned up to the efficient level of 2 ppm and that the total costs of the cleanup were shared equally among the homeowners (stick to integer values here). Will all three homeowners be better off? What problems does this bring up about sharing the costs of public goods?

TABLE 4.2 Individual and Aggregate Demand for Lowering Lake Pollution

Mathematical problem:

Q1. Consider the market for paper products. This market is perfectly competitive, and the    production of paper results in an externality in the form of water pollution from paper mills. This market can be characterized by the following equations (where Q is expressed in thousands of reams):

Supply (MPC): P = 20 + 1.5Q

Demand (MPB): P = 40 - 0.5Q

Marginal External Cost: 2Q

a.   Graph and solve for the competitive equilibrium price and quantity of paper.

b.   Graph and solve for the socially optimal price and quantity of paper (i.e., efficient solution).

c.   What are the net social welfare gains/benefits/loss from internalizing the externality (indicate the area on the graph and solve for the actual number)?

Multiple Choice Questions:

Figure 4.1

1.  Suppose for a given market that the MWTP and MC curves are represented in Figure 4.1. Assuming all market and non-market values are incorporated into the data, the MWTP at the socially efficient level of output is equal to ________.

A. 100 units

B. 140 units

C. $230 D. $250

2. A small coastal community with the power to control access to its scallop fishery is an example of ________.

A. common property rights

B. private property rights

C. an open access resource

D. a positive externality

Figure 4.2

3.  In the Figure 4.2 the net social value is equal to

A. area c

B. areas a + b - c

C. areas a + b + c D. areas a + b

4. ________ cause private and social marginal cost curves to diverge while ________ cause private demand and social marginal WTP to diverge.

A. External benefits; external costs B. External costs; external benefits

C. Market failures; public goods

D. Taxes; subsidies

5. In the case of an open access resource, a(n) ________ takes place due to a lack of ________.

A. externality; regulation

B. free rider problem; ethical behavior C. market failure; property rights

D. external benefit; rivalry in consumption

Figure 4.3

6. In the Figure 4.3, the socially efficient level of output is equal to ________. A. q*

B. qm

C. p*

D. None of the choices are correct.

7. In Table 4.4, social MWTP equals private MWTP plus external benefits from production. In this market, the socially efficient level of output is ________.

A. Q2

B. Q3 C. Q4

D. None of the choices are correct.