Question

1. Suppose the inverse demand curves for Person A and Person B for a PUBLIC GOOD are given by PA-90 -0.30A Ps - 40 - 0.20 and that MC - $35. a Derive the market demand curve. b. Calculate the efficient market allocation (Can). c. Derive the efficient pricing scheme. (Hint: different prices for different individuals) d. If the individuals acted independently, how much of each good would each individual purchase in the market? c. How many total units would the market purchase without intervention (refer to this as the competitive" allocation, Qc)? f Compare the competitive and efficient allocation. 2. Provide one example of a negative externality and one example of a public good or bad) on FSC's campus (you may not use examples we discussed in class), and explain why you have identified them as such 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 is expressed in thousands of reams): Supply (MPC): P = 20 + 1.5Q Demand (MPB): P = 40 -0.50 Marginal External Cost: 20 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.c., efficient solution). c. What are the social welfare gains from internalizing the externality (indicate the area on the graph and solve for the actual number)? 4. a. What are property rights? b. Why are property rights important to the efficient functioning of the market system?

Answer 1

③ ss = 20+1.50 DO = 40-0.56 DO=sS > 40-05Q = 20+1.5Q 40-20 = 1.5Q to.ro 20 = 20 Q = 2% =10 I Price - 20+ 1.5X10 = 20 + 15 = 35 Prie 30 Prie 30 2014 1049 20 10 20 30 40 ? ody OD

loo- 60- Price 20 PA = 90-013 PA @ Market demand curve PB = 40 -0.2QB me=35 80- TR, = PXQ 40 90g - 0.3Q TR2 = 400 - 0.20 MRI = 90- 0.99 MR2 = 40-0.4Q mc=MR, 35 = 90-0.99 0.99 = 90-35 La SS = 6:11 0 20 40 60 80 100 X aty DD 4 0.9 0.4 Mc = MR2 35=40-0.4% 10.49 = 40-35 gadis PA - 90 -0.3x61.11 = 90 - 18.33 = 7:67 PB = 40-0.2X12.5 = 40-2.5 37.5
2) Negative externality

Negative externality occur when the consumption or production of a good causes a harmful effect to a third party or to another person.

Eg:- Smoking may badly affect others

Loud music may or may not affect badly.

Sound horn most of the time may affect badly.

Public goods:-

Public good  is a good that is both non-excludable and non-rivalrous.

Eg:- fresh air, knowledge, lighthouses, national defense, flood control systems, and street lighting.

4) a) A property right is the exclusive authority to determine how a resource is used, whether that resource is owned by government or by individuals.

b)Property rights  provide incentives for individuals to participate in economic activities, such as investment, innovation and trade, which lead to a more efficient market.