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PART A (65%) Answer four of the following questions. Use diagrams where appropriate in your answers Say that the Average Cost curve for a good is downward sloping, so the market for the good is a natural monopoly; in addition, say that the Demand curve for the good lies below the Average Cost curve at all output levels. How should the government decide whether this good should be provided or not? 1. 2. Draw the social indifference map that depicts the Rawlsian social welfare function and explain its shape 3. What is a non-exclusive good? Outline how Lindahl pricing could be used to decide how much individuals 4. Using a diagram, explain the term bliss point What does this social welfare function imply for the distribution of resources in society? should pay for a non-exclusive good and briefly mention the main problems with this approach. 5. What is a lump-sum tax? Why are lump-sum taxes preferred to other taxes?
Part 1,2,3
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The government needs to make a comparative analysis of the cost it has to incur in subsidizing the losses of the monopolist and satisfaction derived by the consumers from consuming that good and then make the decision. This can be depicted as follows:

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