Public Finance Harvey Rosen 10e - Test Bank

(a) Find the equilibrium price and quantity in the market for wigs.
(b) Find the socially optimal level of wigs and the corresponding price.
(c) How much should the wig factory be taxed per wig?

(a) Calculate the efficient quantity of waste.
(b) What is the efficient fee, in dollars per unit of waste, which would cause the firm to dump only an efficient quantity of waste?
(c) What would be the quantity dumped if the firm did not care about the fishery?

(a) Show the amount of pesticides used if each uses the privately optimal level of pesticides.
(b) Show the amount of pesticides used if they are socially concerned.
(c) Why is a reduction back to X_H = H_T not socially desired?

Cap-and-trade versus emissions fee when marginal social benefits are inelastic and costs are uncertain:

Cap-and-trade versus emissions fee when marginal social benefits are elastic and costs are uncertain:

a) In case of an inelastic marginal social benefit curve, what type of pollution reduction system should the government employ? Why?
b) If the social benefit curve is elastic, do you answer change?
c) What are advantages and disadvantages of Cap-and-Trade systems over Emission Fee systems when the inflation and change in marginal costs are considered?

(a) Find the equilibrium price and quantity in the market for wigs.
(b) Find the socially optimal level of wigs and the corresponding price.
(c) How much should the wig factory be taxed per wig?

(a) Set PMC equal to demand and solve for P and X. X = 50/9, P = 170/9.
(b) Find SMC by adding PMC to MD. Set SMC equal to demand and solve for P and X. X = 49/11, P = 232/11.
(c) At X = 49/11, subtract PMC from SMC. Tax = 109/22.

(a) Calculate the efficient quantity of waste.
(b) What is the efficient fee, in dollars per unit of waste, which would cause the firm to dump only an efficient quantity of waste?
(c) What would be the quantity dumped if the firm did not care about the fishery?

(a) Set MD = MB and solve for Q*. Q* = 4.
(b) Insert 4 units into either MD or MB. Fee = 22.
(c) If the firm did not care about the fisheries, then they will discharge was as long as its marginal benefit is greater than 0. Therefore, set MB equal to zero and solve for X. X = 34/3.

Without intervention, optimal will be where PMB = 0. X = 15. The efficient level is X = 5. The area beneath the PMB is gained. Gain = 25.

(a) Show the amount of pesticides used if each uses the privately optimal level of pesticides.
(b) Show the amount of pesticides used if they are socially concerned.
(c) Why is a reduction back to X_H = H_T not socially desired?

(a)

(b)

(c) Not socially optimal.

Cap-and-trade versus emissions fee when marginal social benefits are inelastic and costs are uncertain:

Cap-and-trade versus emissions fee when marginal social benefits are elastic and costs are uncertain:

a) In case of an inelastic marginal social benefit curve, what type of pollution reduction system should the government employ? Why?
b) If the social benefit curve is elastic, do you answer change?
c) What are advantages and disadvantages of Cap-and-Trade systems over Emission Fee systems when the inflation and change in marginal costs are considered?

a) When the social marginal benefit curve is inelastic then the government should employ a cap-and-trade system because it is more efficient than the emission fee system. Emission fee system allows too little pollution compared to fairly higher pollution than efficient quantity of cap-and-trade system.
b) When the social marginal benefit curve is elastic then the government should employ an emission fee system because it is more efficient. Cap-and-trade system allows too much pollution reduction compared to fairly close pollution reduction of emission fee system.
c) Cap-and-Trade systems are superior in high inflation environments since it requires no legislative or regulatory action in response to inflation. Moreover, emission fee systems are not appropriate when the marginal cost of pollution reduction is not constant. With emission fee systems, pollution reduction decreases as marginal costs increase. However with cap-and-trade systems, pollution reduction is constant as marginal costs increase. Finally if the government is uncertain about the marginal cost of pollution reduction, then the effective reduction system depends on the elasticity of marginal social benefits.

Although answers will vary, the main reason is monitoring costs and the costs involved in punishment strategies for offenders. Incentive systems induce firms to act in their own best interests which are less time consuming.

Although answers may vary, the reader should take into account how responsive each policy is to inflation. In addition, there should be some mention of the responsiveness to cost changes and uncertainty. Therefore when marginal social benefits are inelastic and costs are higher than expected, cap-and-trade achieves too much reduction and an emissions fee achieves too little reduction.

Bargaining costs are generally not zero. Identifying damages is difficult. There is generally some amount of asymmetric information.