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foundations of microeconomics

Questions and Answers of Foundations Of Microeconomics

2. The efficient quantity of milk is 60 gallons a day—the quantity at which the marginal social cost equals the marginal social benefit. Marginal social cost equals marginal private cost plus
1. The quantity of milk produced is 100 gallons a day—the quantity at which the marginal private cost equals the marginal social benefit. See Figure 1 .
4. If ITQs were issued for the efficient quantity of milk production, what would be the market price of an ITQ?Solutions to Practice Problems Figure 1
Explain how ecotourism changes incentives and might avoid the tragedy of the commons for many species, including those mentioned in the news clip.
Can ecotourism help save endangered species?Well-practiced ecotourism is helping to conserve the orangutan, humpback whale, African lion, snow leopard, and many other species and drawing dollars to
2. What is the efficient quantity of milk to produce? On a graph show the deadweight loss from overproduction.Source: www.thetravelworld.com, May 22, 2012 In the News
Cows graze on common pasture and can produce milk in the amounts shown in Table 1 . The marginal private cost of producing milk is zero.Quantity of milk(gallons per day)Marginal external cost
Explain the tragedy of the commons and review its possible solutions.11.3 Table 1 Practice Problems
In the United States the opposition to ITQs was so strong that the fishing industry persuaded Congress to outlaw them. In 1996, Congress passed the Sustainable Fishing Act that put a moratorium on
In all countries, the fishing industry opposes restrictions on its activities, but in the countries that pioneered ITQs, the opposition was not strong enough to block them.
ITQs help maintain fish stocks, but they also reduce the size of the fishing industry. This consequence of adopting ITQs to restore fish stocks pits the use of ITQs against the self-interest of
Fisheries that are managed with ITQs are half as likely to collapse as those that are not.
One study found that ITQs even reverse a trend decline and turn it around to a trend recovery.
Studies based on large data sets from more than 10,000 fisheries recorded for more than half a century have shown that without ITQs, there would be a major collapse of the global fish stock, but that
Today, 28 U.S. fisheries and 150 major fisheries and 100 smaller fisheries around the world, representing 10 percent of the world’s marine life harvest, is managed by ITQs.Marine biologists and
Economists agree that ITQs offer an effective tool for achieving an efficient use of the stock of ocean fish.Iceland, the Netherlands, and Canada were the first countries to adopt ITQs in the late
EYE on the GLOBAL ECONOMY ITQs Work
Now no one has an incentive to cheat and exceed the quota because to do so would send marginal cost above the market price and result in a loss on the marginal catch. The outcome is efficient.
Watch An ITQ to Use a Common Resource Efficiently
(2) The market equilibrium is efficient with 300,000 tons a year caught at the marginal social cost and market price of $15 a pound.
(1) The market price of an ITQ equals the marginal external cost of fishing and confronts fishers with the marginal social cost of their decisions.
The marginal private cost curve shifts upward from MC to of ITQ and each fisher is confronted with the marginal social cost of fishing.MC + price Figure 11.10 An ITQ to Use a Common Resource
Figure 11.10 illustrates how ITQs work. Each fisher receives an allocation of ITQs and the total catch permitted by the ITQs is 300,000 tons per year. Fishers trade ITQs: Those with low marginal cost
A fisher with an ITQ could sell it for the market price, so by not selling the ITQ the fisher incurs an opportunity cost. The marginal cost of fishing, which now includes the opportunity cost of the
Where producers are difficult to monitor or where marginal cost varies across producers, a more sophisticated quota system, called an individual transferable quota, can be effective. An individual
A production quota can work, but only if the activities of every producer can be monitored and all producers have the same marginal cost. Where producers are difficult or very costly to monitor or
Second, marginal cost is not, in general, the same for all producers—as we’re assuming here. Some producers have a comparative advantage in using the resource. Efficiency requires that the quota
First, it is in every fisher’s self-interest to catch more fish than the quantity permitted under the quota. The reason is that the market price exceeds marginal private cost, so by catching more
the absence of property rights, some form of government intervention is used, one of which is a production quota.
But assigning private property rights is not always feasible and it isn’t a practical solution to the problem of overfishing. The cost of policing millions of square miles of ocean would be far
The private property solution to the tragedy of the commons is available in some cases. It was the solution to the original tragedy of the commons in England’s Middle Ages. It is also a solution
(3) The quantity caught, 300,000 tons, is the efficient quantity.Watch Property Rights Achieve the Efficient Use of a Common Resource
(2) The market equilibrium occurs at the intersection of MSC and MSB and the resource use is efficient.
(1) The marginal cost curve, which is also the market supply curve, includes all the costs of fishing, so it is also the marginal social cost curve, S = MC = MSC.
With property rights to the fish stock assigned, fishers pay the owner of the fish stock for permission to fish and face the marginal social cost of their decisions.
Figure 11.8 Property Rights Achieve the Efficient Use of a Common Resource
The demand curve is the marginal social benefit curve, MSB. The market price and equilibrium quantity are determined by supply and demand at $15 per pound and an annual catch of 300,000 tons. At this
Figure 11.8 illustrates the efficient outcome when private property rights over a resource are established and enforced. The marginal private cost curve, MC, and the market supply curve, S, are the
who leases it from its owner, the opportunity cost of using it is the rent paid to the owner.
A common resource that no one owns and that anyone is free to use contrasts with private property, which is a resource that someone owns and has an incentive to use in the way that maximizes its
Individual transferable quotas (ITQs)Property Rights
The three main methods that might be used to achieve the efficient use of a common resource are Property rights Production quotas
It is easier to define the conditions under which a common resource is used efficiently than to deliver those conditions. To use a common resource efficiently, it is necessary to design an incentive
Concept Video: Using the Commons Efficiently Using the Commons Efficiently
Figure 11.7 illustrates this loss. It is the marginal social cost minus the marginal social benefit from all the fish caught in excess of the efficient quantity.
Deadweight loss measures the cost of overfishing. The gray triangle in
At this quantity, the marginal social cost (on the MSC curve) and marginal social benefit (on the MSB curve) are equal.Deadweight Loss from Overfishing
The efficient quantity is where marginal social benefit equals marginal social cost. In Figure 11.7 , the efficient quantity of fish is 300,000 tons.
(3) The market equilibrium quantity exceeds the efficient quantity and overfishing brings a deadweight loss.Watch Why Overfishing Occurs Efficient Equilibrium
at a quantity of 300,000 tons a year.
(2) The marginal social cost curve is MSC and the efficient equilibrium is
(1) The market equilibrium occurs at a quantity of 800,000 tons and a price of $10 a pound—an overfishing equilibrium.
The market supply curve is the marginal private cost curve, MC, and the market demand curve is the marginal social benefit curve, MSB.
supply curve is the marginal private cost curve, MC. Market equilibrium occurs at the intersection point of these two curves. The equilibrium quantity is 800,000 tons of fish per year and the
Figure 11.7 illustrates overfishing and how it arises. The market demand curve for fish is the marginal social benefit curve, MSB. The market
Figure 11.7 Why Overfishing Occurs Overfishing Equilibrium
Source of information: Codfishes —Atlantic cod and its fishery, http://science.jrank.org/
Source of data for graph: Millennium Ecosystem Assessment.
The marginal social benefit from fish is the price that consumers are willing to pay for an additional pound of fish. Marginal social benefit decreases as the quantity of fish consumed increases, so
Marginal Social Benefit and Demand
These technological advances brought soaring cod harvests. In less than a decade, cod landings increased from less than 300,000 tons a year to 800,000 tons.This volume of cod could not be taken
The situation changed dramatically during the 1960s with the introduction of high-efficiency nets (called trawls, seines, and gill nets), sonar technology to find fish concentrations, and large ships
Fish were caught using lines and productivity was low. But low productivity limited the catch and enabled cod to be caught sustainably over hundreds of years.
weighing in at more than 220 pounds and measuring up to 6 feet in length.
Before 1970, Atlantic cod was abundant. It had been fished for many centuries and was a major food source for the first European settlers in North America. In 1812, there were more than 1,600 fishing
The North Atlantic Cod Tragedy of the Commons
Because both components of marginal social cost increase as the quantity caught increases, marginal social cost increases with the quantity of fish caught.EYE on the GLOBAL ECONOMY
The marginal external cost of catching fish is the cost per additional ton that one fisher’s production imposes on all other fishers. This additional cost arises because one fisher’s catch
The principle of increasing marginal cost applies to catching fish just as it applies to other production activities. Crew fatigue, overfull refrigerators, and a lower speed to conserve fuel decrease
The marginal private cost of catching fish is the fishers’ cost of keeping a boat and crew at sea for long enough to increase the catch by one ton.
The marginal social cost of catching fish is the marginal private cost plus the marginal external cost.
with the marginal social cost of catching fish.Marginal Social Cost
Even if the catch is sustainable, it will exceed the efficient catch:overfishing occurs. Why does overfishing occur? The answer is that fishers face only their own private cost and don’t face the
The pursuit of self-interest results in overfishing.Inefficient Use of a Common Resource
You now understand the sustainable use of a resource, but another problem is its efficient use.
A, the cod stock grows. If the quantity caught equals the sustainable catch, at any point on the SCC, the fish stock remains constant and is available for future generations of fishers in the same
If the catch rate is less than the sustainable catch rate, at a point such as
(4) If the catch exceeds the sustainable catch, such as at point B, the fish stock diminishes.Watch Sustainable Catch
(3) If the catch is less than the sustainable catch, such as at point A, the fish stock grows.
(2) As the fish stock increases (on the x-axis), the sustainable catch (on the y-axis) increases to the maximum sustainable catch. As the stock increases further, the fish must compete for food and
(1) Along the sustainable catch curve, SCC, the fish stock is constant.
Figure 11.6 illustrates the relationship between the stock and sustainable catch. The sustainable catch curve, SCC, shows the sustainable catch rate at each stock size. As the stock increases, the
Figure 11.6 Sustainable Catch
The sustainable catch depends on the stock. With a small stock, few fish are born, so only a small quantity can be sustainably caught. With a large stock, many fish are born but they must compete
England became a wool exporter to the world. Sheep farming became profitable and sheep owners needed better control of the land they used, so the commons were gradually enclosed and privatized.
During the sixteenth century, when the price of wool increased,
Because the commons were open to everyone, no one had an incentive to ensure that the land was not overgrazed. The result was an overgrazing situation similar to that of overfishing in some of
The term “the tragedy of the commons” comes from fourteenth century England, where areas of rough grassland surrounded villages. The commons were open to all and were used for grazing cows and
The Commons of England’s Middle Ages
Think about cod in the North Atlantic. At any given time, there is a stock of cod, a rate of renewal, and a rate of use—a catch rate. If the rate of renewal exceeds the catch rate, the cod stock
Renewable common resources such as fish and trees replenish themselves by the birth and growth of new members of the population.
discover that there are two problems that give rise to the tragedy of the commons:Unsustainable use of a common resource Inefficient use of a common resourceUnsustainable Use of a Common Resource
Overgrazing the pastures of a village in Middle Ages England and overfishing North Atlantic cod during recent decades are tragedies of the commons. The tragedy of the commons is the overuse of a
Watch Concept Video: The Tragedy of the Commons
Watch Solutions Video: Public Goods and The Free-Rider Problem Click here to open your MyEconLab Study Plan and work these interactive problems online.Key Terms Quiz
3. The Department of Mosquito Control would most likely overprovide because the bureau would try to maximize its budget.
2. A private program would provide zero spraying because the free-rider problem would prevail. The efficient quantity is 3 square miles a day—the quantity at which the marginal social benefit
1. Fire protection is a public good; a July 4th fireworks display is a public good. In both cases, the free-rider problem is avoided by public provision and financing through taxes. Interstate 80 in
Broadcast television is nonrival and nonexcludable, so it is a public good. PBS has a free-rider problem because only viewers who choose to contribute toward the cost of its service actually pay,
Solutions to Practice Problems Solution to In the News

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