Unit 6: Market Failures

Problem Set #6 Points Distribution

1. Public Goodsa. Characteristics • 1 Point- Identifies non-excludability

• 1 Point- Defines non-excludability

• 1 Point- Identifies non-rivalry (shared consumption)

• 1 Point- Defines non-rivalry

• 1 Point- Clear example

b. Public Sector• 2 Point- The government (Public sector) must provide the good to

everyone

• 1 point- If left up to the free market not enough would be produced

• 2 Point- Explains that Free Riders make profit impossible

2. Externalitiesa. SUVs and Negative externalities (10 Points)

i. 1 Point –first clear externalities explaining who pays spillover costs

1 Point- second clear externality explaining who pays costs

ii. 1 Point- Correct graph with two S curves labeled MSC and MPC

1 Point- Free market P and Q

1 Point- Socially optimal P and Q

iii. 1 Point- MSC>MSB

1 Point- Good is overproduced

1 Point- Free market fails to produce because it doesn’t include spillover cost

iv. 1 Point- Tax

1 Point- Graph shows left shift in supply

2b. Externalitiesb. Parks and positive externalities (10 Points)

i. 1 Point –first clear externalities explaining who pays spillover benefits

1 Point- second clear externality explaining who pays benefit

ii. 1 Point- Correct graph with two D curves labeled MSB and MPB

1 Point- Free market P and Q

1 Point- Socially optimal P and Q

iii. 1 Point- MSC<MSB 1 Point- Good is underproduced 1 Point- Free market fails to produce because it doesn’t include spillover benefits

iv. 1 Point- Subsidize (specify producer or consumer) 1 Point- Graph shows right shift in supply (subsidy to producers) or right shift in demand (subsidy to consumers)

3. Anti-Trust Lawsa. Purpose

• 2 Points- To promote competition and prevent monopolies

• 1 Point- Monopolies charge too much and provide too little (higher price, lower quantity)

• 1 Point- Monopolies are not productively efficient

• 1 Point- Monopolies are not allocatively efficient

b. Tax or Subsidize

• 1 Point- They should subsidize

• 2 Point- Subsidizing lowers MC curve so firms make more

• 2 Point- Taxing increases MC so they make less

3. Anti-Trust Laws

c. Microsoft

• 2 Points- Quality Summary

• 2 Points – Identify what they did to limit competition

• 1 Point- The student obviously read and understood the section

4a. Redistribution of Income

a. Distribution of Income: Types of Taxes

1 Point- Defines Progressive (as income goes up, percent paid goes up)

1 Point- Defines Regressive (as income goes up, percent paid goes down)

1 Point- Defines Proportional (equal percentage of total income)

2 Point- Quality Examples (income, sales tax, property tax)

4. Redistribution of Incomeb. Lorenz Curve

• 2 Point- The given average doesn’t show how money is distributed or reflect individual’s standard of living.

• 1 Point- The poor and extremely rich skew the data

• 2 Point- Government compares perfect equality to actual equality

• 2 Point- The further the Lorenz curve is from the line representing equal distribution, the further the society is from income equality

• 3 Point- Lorenz Curve clearly graphed

FRQ#1

6 Points

FRQ#2

8 Points