QUESTION 1

Explain how the 2 characteristics of public goods create the free-rider problem. Does the existence of public goods violate Coase's theorem?

QUESTION 2

(a) What are the conditions for equilibrium in a competitive market?

(b) Point out differences between the short and long run in these markets.

(c) Compare the outcomes above with that obtained under monopolistic competition

QUESTION 3

Beechtree produces kitchen cabinets. As a result of the finishing process, a chemical is released into the environment which causes air pollution. The inverse demand curve for kitchen cabinets is given by Pd = 3,000 Q where Q is the quantity consumed when the price consumers pay is Pd . The inverse supply curve (marginal private cost) is MPC = Q where MPC is the marginal private cost when the industry produces Q . The marginal external cost is given by MEC = Q .where MEC is the marginal external cost per unit of pollutant when Q units of pollutant are released (and one unit of pollutant is released for each "unit" of cabinets produced).

1. What are the equilibrium price and quantity for kitchen cabinets when there is no correction for the externality?
2. How many units should the market supply at the social optimum?
3. Suppose the government wants to impose an emissions fee of T per unit of emissions. How large should T be if the market isto produce the socially optimal quantity of kitchen cabinets?