Market Failure & Government unit test
A test on this unit alone, marked as a percentage and a letter grade — for the test your class is actually sitting, rather than for May. Answer everything, then submit once: seeing the answer to question 3 before attempting question 4 makes the final percentage meaningless.
Marginal private cost vs marginal social cost
Common resource
Proportional tax
Negative externality
Public good
Size of the corrective tax
Tragedy of the commons
Regressive tax
The Gini coefficient
Income versus wealth
Rivalry can depend on the situation
Market failure
Short answer 1. Define or explain: The free-rider problem comes from non-excludability
3 ptsShort answer 2. Define or explain: What a Gini hides
3 ptsShort answer 3. Define or explain: The Lorenz curve
3 ptsShort answer 4. Define or explain: Positive externality direction
3 ptsFree response
7 ptsA factory produces a chemical. The market equilibrium quantity is 900 tons at a price of $60 per ton. Production imposes a pollution cost of $25 per ton on nearby residents, and the socially optimal quantity is 700 tons. (a) Draw a correctly labeled graph showing marginal private cost, marginal social cost and demand, and identify both the market quantity and the socially optimal quantity. (b) Identify the per-unit corrective tax that would achieve the socially optimal quantity, and explain why that is the correct amount. (c) Calculate the deadweight loss in the untaxed market, assuming linear curves. (d) Explain why this corrective tax reduces deadweight loss, whereas a tax of the same size on a good with no externality would create deadweight loss.
Draw a labeled graph with MPC, MSC and demand, identifying both quantities.
Identify the corrective tax and explain why it is the correct amount.
Calculate the deadweight loss in the untaxed market.
Explain why a corrective tax reduces deadweight loss while an ordinary tax creates it.