Question

 Look at the tables below, which show, respectively, the willingness to pay and willingness to accept of buyers and sellers of individual bags of oranges. For the following questions, assume that the equilibrium price and quantity will depend on the indicated changes in supply and demand. Assume that the only market participants are those listed by name in the two tables.

 a. Given the equilibrium price of S10, what is the equilibrium quantity given the data above?

 b. What if, instead of bags of oranges, the data in the two tables dealt with a public good like fireworks displays? If all the buyers free ride, what will be the quantity supplied by private sellers?

 c. Assume that we are back to talking about bags of oranges (a private good), but that the government has decided that tossed orange peels impose a negative externality on the public that must be rectified by imposing a $2-per-bag tax on sellers. What is the new equilibrium price?

 What is the new equilibrium quantity?

 If the new equilibrium quantity is the optimal quantity, by how many bags were oranges being overproduced before?

Answer 1

a)

The demand denotes the willingness to pay for each marginal consumer and the supply denotes the willingness to receive of each seller. The consumer will only buy the goods if the market price is lower than their willingness to pay (WTP). At the market price of $10, each one of the consumers is willing to buy the goods. Because each has WTP equal to or greater than $10. Then the quantity demanded is 6.

On the other hand, the supplier will only supply the goods if the market price is greater than or equal to the price they willing to receive. From the table, each seller will be willing to supply the good at $10, because their supply cost is less than or equal to $10. Therefore, the quantity supplied is 6.

Therefore, at the market price of $10, the quantity demanded is equal to quantity supplied. Hence, the equilibrium quantity of oranges is

• 6 bag(s)

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b)

The free rider problem occurs when every consumer thinks that other will pay for the good and enjoys the good without paying for the good. this problem occurs with public good with property of nonexcludability and nonexclusivity. That is in case of public good consumption of one does not decrease consumption of other and in is not possible to exclude anyone from enjoying the good.

Therefore, in the case of the free-rider problems, no one pays for the good and the market price is zero. At this price, no producer is willing to supply the goods.

Therefore, the equilibrium consumption is

• 0 oranges.

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c)

After tax the price each producer willing to receive is given in the table below

Person	WTP	Person	MAP	After tax MAP
Bob	15	Ca	5	7
Berb	14	Cou	6	8
Bill	13	Chu	7	9
Bart	12	Ci	8	10
Bent	11	Cr	9	11
Betty	10	Cha	10	12

Equilibrium occurs where WTP=After tax MAP. This occurs at P=$11. The equilibrium price after tax is

• P*=$11

Answer 2

a) We see that all the buyers have a willingness to pay that is greater than 10. Given equilibrium price 10, all the buyers will buy oranges. Thus Q* = 6

b) If instead of oranges there were public goods like fireworks, then none of the consumers would have the incentive to pay. Public goods are prone to free rider problem as they can be enjoyed by all without any cost. Therefore, quantity supplied by the sellers would be 0. Q* = 0.

c) If $2 tax is imposed on sellers, the new equilibrium price P* = 10 +2 = $12

Only 4 buyers have a maximum willingness to pay that is greater than $12. Thus Q* = 4,

If this is the optimal quantity, (6-4) = 2 bags were being overproduced.