Assignment 5 Answers
2. a) Fire extinguishers might exhibit positive externalities because they are often used as public goods that serve all people including those who have not paid for them. Thus, the benefits of purchasing fire extinguishers are enjoyed by other individuals who were not involved in the transaction.
b) A graph of the market for fire extinguisher
S= private marginal benefit/ social cost curve
SCC= Social Cost Curve
SVC=Social value curve
The equilibrium output level is indicated by Q1. However, the social demand is higher than the social cost since fire extinguishers exhibit positive externalities. Thus, Q2 is the market's equilibrium demand due to high social demand. Q2 is greater than Q1 because the social demand for extinguishers is greater than the market demand. Social efficiency occurs at Q2 where social benefit= social cost.
c) If there is an external benefit from the fire extinguishers equal to $ 10, the most appropriate government policy that would lead to the efficient outcome would be to increase the subsidies on the manufacture of fire extinguishers in order to maximize the social benefits going to the public (Economics, n.d).
7. a) The externality is the effects that the loud music played by Ringo have on Luciano. Since Luciano does not like the rock music played by Ringo, he suffers negative externality. The social cost is greater than the social benefit.
b) The command policy that is suitable for this case is to order the lowering of volume for the music played by Ringo in order to reduce the external effect the music has on third parties.
c) Ringo is not negatively affected by what Luciano does. Therefore, an efficient outcome would be reached if Ringo agrees to lower the volume of the music he plays. The factor that might prevent them from reaching an efficient outcome is the lack of coincidence whereby each produces a negative externality that has a significant social effect on the other.
8. a) The number of fish produced by each person working on the fish farm remain fixed. However, the population that goes to do fishing may increase as the fishing business becomes profitable. This implies that the number of fish caught every day might decrease with increase in the population of fishermen. Therefore, the law of variable proportion will apply due to market disequilibrium. Fish obtained from the town lakes can be described as industrial products because they have to go through various industrial processes unlike the one obtained from the rural farms.
b) If the government does not regulate the fishing business, people will choose the business that yields more profits. Therefore, to ensure equilibrium, each job will have to yield the same benefits as the other one. Suppose we let the Y be the number of people who work in the fish farm, the number of fish raised per day will be 2Y because each resident raises two fish per day. This means that the number of people who do fishing will be equal to 5-Y because the total population is 5 million people. Given the number of fish caught by each resident as X= 6-N, it means that X= 6-5-Y, which is the same as 1-Y. Therefore, the total number of fish caught by all residents is (5-Y)(1-Y). At equilibrium, the total number of fish caught will be equal to the total number of fish produced. Therefore, (5-Y) (1-Y)=2Y. This leads to a quadratic equation Y2 -8Y+5=0 which gives Y= 2.6. Therefore, the number of residents who work on fish farms is 2.6 million while that of residents who fish in the lakes is 2.4 million. The number of fish produced is equal to 5.2 million.
c)
The number of residents who should work on farms should be 4 million, while the number of people who fish on the lakes should be 1 million for the Wiknam town to produce as many fish as possible.
d) If each person fishing on the lakes is taxed an amount equal to T fish, the total tax that will be collected will be equal to 2T fish. Therefore, if 16 million fish will have to be produced, the value of T will be equal to 8.
e) According to efficiency’s party, the tax collected from all residents who fish on the lakes will be redistributed among the entire population. This policy relates to resource redistribution system that is used by most governments. However, the manner in which the tax is collected results in some people gaining while others lose (Gerber & Hewitt, 1987). Individuals who work on the fish farms will benefit from the tax collected from their fellows who fish on the lakes, yet they will not be taxed. On the other hand, the residents who fish in the lakes will lose because they are selectively subjected to taxation although they are not the only players in the fishing business.
References
Economics. Positive Externalities. Retrieved September 1, 2016 from http://www.economicshelp.org/micro-economic-essays/marketfailure/positive-externality/
Gerber, R. I., & Hewitt, D. P. (1987). Tax competition and redistribution policy of local governments competing for business capital. Journal of Urban Economics, 21(1), 69-82.
