Economics 101 L

Homework No. 12 – Solution Key

WORTH 100 POINTS TOTAL

1. 16 POINTS Classify goods as purely private, purely public, based on the characteristics of rivalry and excludability.

Goods can be classified based on whether or not they are rivalrous and excludable. Rivalry is a situation in which one person’s consumption of a unit of a good or service means that no one else can consume that unit. Excludability is the ability to exclude those who do not pay for a good from consuming it. Goods that are both rivalrous and excludable are pure private goods. In the absence of any significant market failure, private firms will provide these goods at close to efficient levels. A good that is both nonrivalrous and nonexcludable is a pure public good. The government must provide a pure public good in order to correct the market failure problem.

2. 36 POINTS The following table illustrates the relationship between the number of boats that go fishing and the quantity of fish caught. 4 POINTS FOR EACH PART

Boats / Total catch / Average catch / marginal catch / MC
0 / 0 / 0 / 40
1 / 180 / 180 / 180 / 40
2 / 320 / 160 / 140 / 40
3 / 420 / 140 / 100 / 40
4 / 480 / 120 / 60 / 40
5 / 500 / 100 / 20 / 40
6 / 480 / 80 / -20 / 40
7 / 420 / 60 / -60 / 40
8 / 320 / 40 / -100 / 40
9 / 180 / 20 / -140 / 40
10 / 0 / 0 / -180 / 40

a)  Graph in excel total catch on the y-axis and boats on the x-axis. See graph below.

b)  Calculate the average catch and marginal catch. See table above.

c)  What is the marginal private benefit (MB) of operating a boat?

The average catch

d)  Suppose that the marginal cost (MC) of a fishing boat is the equivalent of 40 tons of fish. Draw the MB and MC curves in a separate graph in excel. See graph below.

e)  Find the socially inefficient equilibrium number of boats used.

MC=MB= 8

f)  Explain why this is not a socially optimal outcome.

This leads to overfishing and unsustainable, MB=MC

g)  What is the marginal social benefit (MSB) and draw this curve in the same graph

The marginal catch

h)  Find the socially efficient number of boats that should be used.

MSB=MC at 4 boats

i)  Describe in detail how we can design mechanisms to use this common fish resource sustainably. Suppose you are asked to develop a Quota system. Explain how you set the quota.

Property rights, quotas, or individual transferable quotas could be enforced.

Set up the quota at 4 boats. See graph below.

3. WORTH 28 POINTS Table shows the value of cod caught in the North Atlantic Ocean by American and European fishing boats. The marginal cost of operating a boat is $80,000 a month. EACH PART WITH 4 POINTS.

Number of boats / Vlaue of cod caught ($) / MB / MSB / MC
0 / 0 / 0
10 / 2000 / 200 / 2000 / 80
20 / 3400 / 170 / 1400 / 80
30 / 4200 / 140 / 800 / 80
40 / 4400 / 110 / 200 / 80
50 / 4000 / 80 / -400 / 80
60 / 3000 / 50 / -1000 / 80
70 / 1400 / 20 / -1600 / 80

a)  What is the marginal private benefit of a fishing boat at each quantity of boats shown in the table? See above table.

b)  What is the marginal social benefit of a fishing boat at each quantity of boats shown in the table? See above table.

c)  In excel, graph the MB, MSB, and MC curves. See graph below.

d)  With no regulation of cod fishing, what is the equilibrium number of boats and value of cod caught? 50 boats

e)  Is the equilibrium in part (c) an over-fishing equilibrium? Yes

f)  What is social efficient number of boats and social efficient value of the fish?

30 boats

g)  If the US, Canada, and Europe agreed to impose a quota, what would be the total value of the catch? $4,200

4. WORTH 20 POINTS – 10 POINTS EACH The following table shows the quantities of car alarms demanded and supplied per year in Ames, IA.

Price / Quantity demanded / Quantity supplied
$75 / 800 / 0
$100 / 750 / 150
$125 / 700 / 300
$150 / 650 / 450
$175 / 600 / 600
$200 / 550 / 750
$225 / 500 / 900
$250 / 450 / 1050

Determine the efficient quantity exchanged in the market in each of the following scenarios:

a)  Each car alarm sold creates a negative eternality (noise) that causes $100 in harm to the public. (You don’t need to create the graph, but doing so may help you see the answer.)

The efficient quantity is 450 car alarms. This can be found by asking how many car alarms would consumers buy if they were subject to a tax of $100 per car alarm. The new demand schedule would look like:

Price / Quantity Demanded
$75 / 600
$100 / 550
$125 / 500
$150 / 450

Quantity supplied equals quantity demanded at 450 car alarms.

b)  The efficient quantity is 750 car alarms. This can be found by asking how many car alarms would producers supply if they given a $100 subsidy per car alarm. The new supply schedule would look like:

Price / Quantity Supplied
$75 / 600
$100 / 750
$125 / 900
$150 / 1050

Quantity supplied equals quantity demanded at 750 car alarms.