11 Problems with the Private Sector
11.1 Introduction to economic efficiency
Review Activities
Problems
No problems for this section.
External Resources
Khan Academy: Demand Curve as Marginal Benefit Curve
11.2 Market power
Review Activities
No review activities for this section.
Problems
No problems for this section.
External Resources
No external resources for this section.
11.3 Externalities
Review Activities
Problems
Problem 11.3.1: Vaccines are meant to reduce the likelihood of getting a communicable disease. For the sake of this example, let us consider the measles. In addition, others, including those that are not vaccinated, are also less likely to get measles. What type of externality does the measles vaccine create? Show this graphically.
Solutions: See video for graph. Vaccines create a positive externality. That means that vaccines will be underprovided.
Problem 11.3.2: Traffic in a city is a problem. There is mass congestion and the time to travel from one part of the city to another is burdensome. What type of externality does traffic create? Show this graphically.
Solutions: See video for graph. Traffic creates a negative externality. This means that there will be more people driving than is socially optimal.
Problem 11.3.3: For each of the following policies, determine if they are command-and-control or market-based. Also, for each, if you answered that it was command-and-control, give a market-based alternative. If you answered that is was market-based, give a command-and-control alternative.
- It is illegal to kill a bald eagle.
- Students pay 5 cents per page printed.
- The EPA wants all cars to achieve a minimum of 30 miles per gallon. Car companies pay a fine of $100 million for every mile per gallon below the threshold for each model of car.
- Chlorofluorocarbons (CFCs) are banned under the Montreal Protocol of 1987.
Solutions: Command-and-control (sell permits to hunt bald eagle); Market-based (place a hard limit of 300 pages per semester); Market-based (make it illegal for any car to be sold which gets less than 30 mpg); Command-and-control (charge a pollution charge per ton of CFCs emitted.)
External Resources
Khan Academy: Negative Externalities
Khan Academy: Positive Externalities
11.4 Public goods and common resources
Review Activities
Problems
No problems for this section.
External Resources
Khan Academy: Tragedy of the Commons
Khan Academy: Rival and Excludable Goods
11.5 information problems
Review Activities
Problems
No problems for this section.
External Resources
No external resources for this section.
