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.
MSB and MSC
Moral hazard
Pigouvian tax
Common resource
Positive externality direction
Income versus wealth
The two quantities
Why a corrective tax reduces deadweight loss
Positive externality
Gini coefficient
Negative externality direction
Asymmetric information
Short answer 1. Define or explain: Rivalry and excludability
3 ptsShort answer 2. Define or explain: Club good
3 ptsShort answer 3. Define or explain: Coase theorem
3 ptsShort answer 4. Define or explain: Why command-and-control costs more
3 ptsFree response
5 ptsThe market for a chemical produced in the town of Weyburn generates significant water pollution that harms downstream communities. The chemical is currently produced in an unregulated competitive market.
A. Describe precisely what a correctly labeled graph of this market would show, including the axis labels, the marginal private cost and marginal social cost curves, the demand curve, and the market quantity Q_m and the socially optimal quantity Q_s.
B. Indicate whether the market quantity is greater than, less than, or equal to the socially optimal quantity.
C. Identify the area of deadweight loss on your graph.
D. Identify a per-unit tax that would achieve the socially optimal quantity, and explain how it works.
E. Identify one reason a government might have difficulty setting the tax at the correct level.