In this section, answer TRUE (T) or FALSE (F) or write the letter (T or F) of your choice of the correct answer. You are not required to give any justification for your or an explanation of your answer so just state the letter in the space provided. Each correct answer is 1 mark.

Question 1A: Welfare economics is a branch of economics devoted to study of the welfare state.

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Question 1B: When deciding to raise tax revenue, the government should not give consideration whether to levy the tax on goods that are price elastic or price inelastic. This is because the incidence of a tax does not depend on whether the tax is levied on buyers or sellers.

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Question 1C: The deadweight loss of a tax is the fall in consumer surplus that results from the market distortion caused by the tax.

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Question 1D: Public goods are not only rival but also rival.

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Question 1E: Government failure is the main source of negative market externalities.

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Question 1F: Tradable pollution permits and Pigovian taxes are similar in effect.

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Question 1G: Moral hazard is the tendency for the mix of unobserved attributes to become undesirable from the standpoint of an uninformed party.

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Short Answer Questions (TOTAL: 33 marks)

In this section, provide BRIEF and CONCISE answers in the space provided. You may use a diagram/graph to illustrate your answer where necessary. If you require more space, you can use the space bar. Marks per question are indicated.

Question 2A: Suppose government is aware of a polluter, and would like to use a pollution emission limit or a quantity tax as instrument to influence its behaviour. [8 Marks]

Would you advise government to use an emission limit control or a quantity tax? (1 mark)

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Justify your answer to Q2A (a).(7 marks)

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Question 2B: Consider the problem of building a levee (a physical structure) that provides flood protection to a community of 10,000 farmers who lose valuable crops during annual flooding. [8 Marks]

Would you expect a single farmer to voluntarily fund construction of the levee in her private capacity? Answer YES or NO. (1 mark)

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Use microeconomics theory to justify your answer to Q2B (a). (7 marks)

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Question 2C: Suppose a group of households living in a frequently flooded river delta had to make a choice between purchasing either flood damage or car accident insurance. [8 Marks]

Would it be easier to find a firm willing to cover for flood damage or for personal car accident?(1 mark)

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Use microeconomics theory to justify your answer to 2C (a). (7 marks)

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Question 2D: Assume two neighbours Bonolo (B) and Thato (O) are living in an isolated area. They want to build a road from their homes to the main road. The marginal cost (MC) of 1 kilometre of road is R500, 000.00 (Rands). The marginal benefit Bonolo gets from the road is (MBB) while the marginal benefit for Thato is (MBT) [9 Marks]

Explain the meaning that the socially efficient allocation of road must satisfy the condition: MBB+MBT= MC. (4 marks)

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Bonolo and Thato are required to make a contribution toward the financing of the road. If they are selfish economic agents who act in an uncoordinated manner, explain why the sum of their contributions is likely to fall short of the socially optimal allocation in Q2D (a) (5 marks)

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Calculation/Analysis/Derivation Questions (TOTAL: 35 marks)

In this section, provide BRIEF and CONCISE answers showing your work and/or justification. Simply stating an answer without justification/derivation will not be rewarded with any mark. Marks per question are indicated.

Question 3A.Suppose that construction of a new building for a business in the Kimberley City Centre creates a negative externality in the form of traffic because the clients of the new business will clog the surrounding roads. This means that people who live nearby will have to set aside more time to complete road trips and to run errands. If you were the Economist in the Town Planning Department of Sol Plaatje Municipality, outline and discuss the pros and cons of any three policy responses to this problem of congestion. (Each part of the question is worth 5 marks). [15 Marks]

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Question 3B:Suppose that the demand Q^Dand supply Q^Sfor milk in South Africa is given by

p=120-0.7Q^Dand p=3+0.2Q^S

where the quantity is in millions of litres and the price (p) is in rands per litre. Assume that South Africa does not import or export milk. Answer the following: [20 Marks]

Find the market equilibrium quantity and the equilibrium price (Hint: set the two equations equal and solve for Q and then p). (5 marks)

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Find the consumer and producer surplus at the market equilibrium that you found in part 3B (a). (6 marks)

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What is the deadweight loss from introducing the floor? (9 marks)

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