Question 1:

Greater consumption of alcohol leads to more motor vehicle accidents and, thus, imposes costs on people who do not drink and drive.
   
a)  Illustrate the market for alcohol, labelling the demand curve, the social-value curve, the supply curve, the social-cost curve, the market equilibrium level of output and the
 
efficient level of output.
   
b)  On your graph, shade the area corresponding to the deadweight loss of the market equilibrium. (Hint: The deadweight loss occurs because some units of alcohol are consumed for which the social cost exceeds the social value.) Explain.
 

 

Question 2:

The many identical residents of Whoville love drinking Zlurp. Each resident has the following willingness to pay for the tasty refreshment:

First Bottle	$5
Second Bottle	4
Third Bottle	3
Fourth bottle	2
Fifth Bottle	1
Further bottles	0

 
a) The cost of producing Zlurp is $1.50, and the competitive suppliers sell it at this price. (The supply curve is horizontal.) How many bottles will each Whovillian consume? What is each person's consumer surplus?
 

b) Producing Zlurp creates pollution. Each bottle has an external cost of $1. Taking this additional cost into account, what is total surplus per person in the allocation you described in part (a)?
 

c) Cindy Lou Who, one ofthe residents ofWhoville, decides on her own to reduce her consumption of Zlurp by one bottle. What happens to Cindy's welfare (her consumer surplus minus the cost of pollution she experiences)? How does Cindy's decision affect total surplus in Whoville?

 

d)  Mayor Grinch imposes a $1 tax on Zlurp. What is consumption per person now? Calculate consumer surplus, the external cost, government revenue and total surplus per person.
 

e)  Based on your calculations, would you support the mayor's policy? Why or why not? 

 

Question 3: 

There are three industrial firms in Happy Valley. The government wants to reduce pollution
  to 60 units, so it gives each firm 20 tradable pollution permits. 

Firm	Initial Pollution level (Units)	Cost of reducing pollution by one unit ($)
A	30	20
B	40	30
C	20	10

a) Who sells permits and how many do they sell? Who buys permits and how many do they buy? Briefly explain why the sellers and buyers are each willing to do so. What is the total cost of pollution reduction in this situation? 

b) How much higher would the costs of pollution reduction be if the permits could not be traded? 

 

      

Question 4: 

Think about the goods and services provided by state and local governments.

 

 a Using the categories in Figure 11.1, classify each of the following goods, explaining your choice :
      i police protection

      ii garbage collection 

      iii education
      iv rural roads
      v city streets.

 

b Why do you think the government provides items that are not public goods? 

 
Question 5:

 

Wireless, high-speed internet is provided for free in the airport of the city of Communityville.

a  At first, only a few people use the service. What type of a good is this and why?
b  Eventually, more people find out about the service and start using it. The speed of the connection begins to fall. Now     what type of a good is the wireless internet connection?
c  What problem might result and why? What is one possible way to correct thisproblem? 

  

small town. It is easy to exclude someone from using this good: The fire department can just let her house burn down. But fire protection is not rival in consumption: Once a town has paid for the fire department, the additional cost of protecting one more house is small. (We discuss club goods again in Chapter 15, where we see that they are one type of a natural monopoly.) Figure 1 Four Types of Goods Goods can be grouped into four categories according to two characteristics: (1) A good is excludable if people can be prevented from using it. (2) A good is rival in consumption if one person's use of the good diminishes other people's use of it. This diagram gives examples of goods in each category. Excludable? Yes Private Goods Yes Ice cream cones Clothing Congested toll roads Common Resources Fish in the ocean No Rival in consumption? The environment Congested nontoll roads Club Goods No Fire protection Cable TV Uncongested to ma Public Goods Tomado siren National defense Uncongested contul roads Although Figure 1 offers a clean separation of goods into four categories, the boundaries between the categories are sometimes fuzzy. Whether goods are excludable or rival in consumption is often a matter of degree. Fish in an ocean may not be excludable because monitoring fishing is so difficult, but a large enough coast guard could make fish at least partly excludable Similarhe although fish are generally blackweb