1. A particular metal is traded in a highly competitive world market at a world

price of $9 / ounce . Unlimited quantities are available for import into

Moldavia (a small economy) at this price. The supply and demand curves for

this metal in Moldavia are represented by the following:

QD = 40 - 2*P P: $ / ounce

QS = (2/3)*P Q: millions of ounces

Recently, the Moldavian metal industry has been protected by a $9 / ounce

tariff on imported metal. Under pressure from the WTO (the World Trade

Organization), the Moldavian government is considering reducing this tariff

to zero. Threatened by the prospect of this change in policy, the Moldavian

metal industry proposes a voluntary export restraint agreement that would

limit imports of metal into Moldavia to 8 million ounces.

a. With the $9 / ounce tariff in place, what is the equilibrium price and

quantity in the Moldavian metal market? Is there DWL at this equilibrium?

Why or why not?

b. If Moldavia both eliminates the tariff and approves the voluntary export

restraint, what will be the new equilibrium price and quantity in the

Moldavian metal market? Will there be DWL at this new equilibrium?

Explain. Is this equilibrium more or less efficient than the one in (a)?

c. Can you suggest a tariff to replace the voluntary export restraint in (b) that

would keep domestic producer surplus unchanged? Would your tariff

increase or decrease efficiency? Why?

[Hint: Your first task should be to calculate the free trade equilibrium!]

2. The market for vaccines in Madison, WI is characterized by the following

demand and supply schedules:

QD = 50 - 2P P -- $/vaccine

QS = 10 + 2P Q -- vaccines/week

a. Calculate equilibrium price and quantity in the Madison vaccine

market in the absence of any government intervention.

b. The Madison Commissioner of Public Health holds that, because of

added benefits of vaccine use, the efficient/optimal quantity of

vaccines in Madison is actually 40 vaccines/week.

i. Motivate the Commissioner's argument by explaining the

source of the externality here and why it would support

his/her optimal quantity.

ii. Assuming the Commissioner's number is exactly correct, what

per unit tax or subsidy would achieve the efficient/optimal

outcome here? On a well-labeled graph, show the effects of

this government action. Calculate the post policy prices to

consumers and producers of vaccines in Madison. Assuming

the externality cost or benefit is a constant amount per vaccine,

identify with labels the MPC, MSC, MPB and MSB curves. Also,

calculate this constant per-vaccine externality cost or benefit.

iii. Calculate the total externality cost or benefit after the new

policy is enacted. Shade this area on your graph from ii.

c. The Vice Commissioner argues that the most efficient outcome results

from free vaccines. What would be his/her optimal quantity? What

per unit tax or subsidy would produce that result, assuming he/she is

correct? About which curve do the two folks disagree? Explain.

d. Doctors discover that as long as 36 vaccines are consumed, the

epidemic threat in Madison effectively disappears. After that

threshold, individuals still benefit from the vaccine's immunity, but

the epidemic risk drops to zero (basically, this is the "herd immunity"

concept we've been hearing so much about during COVID!). Identify

the efficient quantity NOW in light of the doctors' discovery. [Hint:

Which curve is a bit funky now? Why? ]

Extension Question: Assuming these doctors ARE correct, SHADE the

DWL of the Commissioner's plan from part (b) on your diagram.