1. In which of the following markets do you expect efficient outcomes? Why?…

Pubic Finance
Problems from Rosen 9th Edition: (In case you don’t have this edition, here are the problems)
Chapter 3.
1. In which of the following markets do you expect efficient outcomes? Why? (Please pay attention to Rosen’s definition of efficient markets and those cases where we have market failure. I am not looking for personal opinion here).
A) Hurricane insurance for beach houses
B) Medical care
C) Stock market
D) MP3 Players
E) Loans for students to attend college
F) Housing
2. Some people find ideas such as creating a market for selling one’s kidneys to be morally repugnant. Is it? What would the First Fundamental Theorem say in this regard?
8. In each case listed below, can you rationalize the government’s policy in this regard on the basis of what you read in chapter 3 on welfare economics?
A) In Los Angeles, the police respond to 127,000 burglar alarm calls each year. There is no charge if it is a false alarm, and 97% of calls are false alarms.
B) Legislation passed in 2008 provides some families that cannot meet their mortgage payments with government subsidized mortgages.
C) The Federal Government regulates cherry frozen pies, requiring that 25% of each pie by weight contains cherries and no more than 15% of the cherries can be blemished. There are no such regulations for apple, blueberry or peach frozen pies.
D) Legislation passed in 2008 guarantees American sugar producers 85% of the domestic sugar market.
E) The National Energy Policy Act requires that all new toilets flush with only 1.6 gallons of water. Most American homes have toilets that consume 5.5 to 7 gallons per flush.
F) The US currently provides a subsidy of 51 cents per gallon for ethanol production.
14. Indicate whether the following statements are true, false or uncertain, and justify your answer:
A) If everyone has the same marginal rate of transformation, then the allocation of resources is Pareto efficient.
B) If the allocation of resources is Pareto efficient, then everyone has the same marginal rate of substitution.
gets us into the efficiency concept in micro. We will see that efficiency and equity are in conflict (a lot) and some question whether or not economists have anything useful to say here. Here is one opinion…James Kwak is an historian who writes a blog called Baseline Scenario with Simon Johnson, former chief economist for the IMF (not the guy in jail now!). Take a look at this and see if you agree or not. Cut and paste the URL into your browser since I can’t hot-link it here.
Chapter 4
1. Which of the following do you consider to be pure public goods? Private Goods? Hybrids?
A) Wilderness area B) Satellite Television C) Medical School Education D) Public TV
E) An ATM machine
7. It is estimated that private prisons are about 5 to 15% cheaper, per prisoner, to operate than government run prisons. On this basis, should all prisons be privatized? If not, what other information would you need to make a decision?
11. Suppose there are only two fishermen, Zach and Jacob, who fish along a certain coast. They would each benefit from a lighthouse being built where they fish. The marginal cost of an additional lighthouse is $100. The marginal benefit to Zach of an additional lighthouse is 90-Q, and for Jacob 40-Q, where Q is equal to the number of lighthouses.
A) Without any outside intervention, can we expect that there will be an efficient number of lighthouses along the coast?
B) What is the efficient number of lighthouses? What would be the net benefits to Zach and Jacob if the efficient number were produced?
12. A lone person fishing in a lake can catch 10 fish per day. Each additional person fishing at the lake that day reduces the catch per person by one fish per day. If a person’s preference is to stay home rather than catch less than 4 fish per day, (the opportunity cost of staying home is 4 fish) then how many people will show up at the lake each day to fish? What is the efficient number of people fishing to show up at the lake? Is access to the lake a public good?

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