Chapter 5: discussion questions 3, 4, 5, 7, 9, 13 and 14

3)
During the Democratic presidential primary campaign in 2008, Governor Bill
Richardson said he favored a cap-and-trade approach for carbon regulation
rather than a carbon tax because the latter is passed on to consumers and so
is a bad idea. Then senator Barack Obama disagreed, saying that both the
carbon tax and the cap-and-trade program lead to higher costs for consumers.
Which candidate was correct about the distributional impacts of the two policies?

4)
In the following figure, the number of parties that Casanova gives per month is
measured on the horizontal axis, and dollars are measured on the vertical. MC P is
the marginal cost of providing both parties and MB P is Casanovas marginal
benefit schedule from having parties

- Graphically,
show how many
parties
Casanova will
host
- Suppose there
is a fixed
marginal
external benefit b per party to Casanovas friends. Illustrate this on your
graph
o See the line MSBP
- What is the socially optimal level of parties? How could the Social
Committee induce Casanova to throw this number?
o P* is the social optimal level of parties. The social committee could
induce Casanova to throw this number of parties by providing her a
per-unit subsidy of $b per party
- On the graph, who the optimal subsidy per party and the total amount
paid to Casanova. Who gains and loses under this plan?
o The total subsidy equals the rectangle abcd. Society comes out
ahead by ghc, assuming the subsidy can be raised without any
efficiency, assuming the subsidy can be raised without any
efficiency costs. (Casanovas friends gain gchd, Casanova loses chd
but gains abcd, which is a subsidy cost to government)
5)
In turkey, many shopping mall owners charge different rental rates on their
tenants. The shops of local and relatively unknown brands pay higher rental
rates per square meter than international and famous brand shops. Local shop
owners protest this differential rental system. What motivates mall owners to use
different rates
International brands bring costumer to the malls, which is also beneficial for the
local stores
7)
For each of the following situations, is the Coase Theorem applicable? Why or
why not?
Coase theorem is a legal and economic theory that affirms that where there are
complete competitive markets with no transactions costs, an efficient set of
inputs and outputs to and from production-optimal distribution are selected,
regardless of how property rights are divided. The theorem states that where
there is a conflict of property rights, the involved parties can bargain or
negotiate terms that are more beneficial to both parties than the outcome of any
assigned property rights. It also assets that in order for this to occur, bargaining
must be costless; if there are cost associated with bargaining, such as those
relating to meetings or enforcement, it affects the outcome
- A farmer grows organic corn is at risk of having his crop contaminated by
genetically modified corn grown by his neighbours
o It is very likely that the farmer could negotiate with the neighbours,
provided property rights are clearly defined. Coase Theorem is
applicable

- In Silveiras, Brazil, queen ants are regarded as delicacy, but recently the
ant haul has been dwindling because of pesticides used on eucalyptus
trees that are planted to produce cellulose for paper and other products
o it is unlikely that property rights could be enforced in terms of
catching queen ants in Silveiras. Would it be appropriate to give
compensation to people making a living of selling queen ants, or to
people consuming the ants, or should one compensate the
production of cellulose for paper and other products in order to
make them stop using pesticides? Given the large number of people
who are involved in both sides, costs of negotiations are very likely
to be costly and hence coase theorem does not apply

- Following a military coup in Madagascar, a weak president was installed

who was unable to stop the selling of Rosewood trees to China that were
illegally cut down from the national parks
o Depends on the number of sellers, if only a small group private
negotiations may be possible

- Users of the internet generally incur a zero incremental cost for

transmitting information. Consequently, congestion occurs, and users are
frustrated by delays
o Too many people are involved for private negotiation and
impossible to figure out how to transfer bribes
9)
In India, a drug used to treat sick cows is leading to the death of many vultures
that feed off f of dead cattle. Before the decrease in the number of vultures, they
sometimes used to smash into the engines of jets taking off from New Delhis
airports, posing a serious threat to air travellers, However, the decline of the
vulture populations has led to a sharp increase in the populations of rats and
feral dogs, which are now the main scavengers of rotting meat. There have been
calls for a ban on the drug used to tread the cows.
Identify the externalities that are present in this situation. Comment on the
efficiency of banning the drug. How would you design an incentive-based
regulation to attain an efficient outcome?
The use of the drug to treat sick cows leads to a positive externality (the benefit
enjoyed by air travellers) as well as a negative externality (the costs created by
a larger number of rats and feral dogs). Banning the drug might raise or lower
efficiency, depending on whether the positive externality is larger or whether the
negative externality is larger. There are many ways to design incentive-based
regulations. Policymakers could determine the efficient level of drug usage and
then either allocate or sell the right to use the drug for sick cows
13)
The Kyoto Protocol has tried to create an international framework where
greenhouse gas emissions are limited through a cap-and-trade system. So far, it
has experienced very limited success. The actual greenhouse emissions of many
countries are considered to be much higher than efficient levels. Explore the
challenges experienced during the drafting and implementation of the protocol.
What would the Coase Theorem predict about the emission levels? Why werent
these predictions realized?
Coase theorem predicts provided that transaction costs are negligible, an
efficient solution to an externality problem is achieved as long as someone is
assigned property rights, independent of who is assigned those rights

May not be possible in the case of the Kyoto Protocol due to: The costs to the
parties of bargaining is not likely to be low and the owners of resources cannot
easily identify the source of damages to their property and legally prevent
damages

Suppose that the marginal cost of emissions is very uncertain. In this case, would
you suggest emission fees or cap-and-trade?
Inelastic schedule: the first units of pollution reduction are highly valuable, but
as more reductions occur, their incremental benefit falls off rapidly. Cap-and-
trade system is preferable to an emissions fee when marginal social benefits are
inelastic and costs are uncertain. Intuitively, when marginal social benefits are
inelastic, a change in cost has very little effect on the optimal amount of
pollution reduction. Therefore, a cap-and-trade system (which fixes the amount
of allowable pollution) wont deviate much from the new efficient level
When marginal social benefits are inelastic and costs are higher than expected,
neither cap-and=trade nor an emissions fee is perfectly efficient. Cap-and-trade
achieves too much pollution reduction and an emissions fee achieves too little
pollution reduction. However, cap and trade is more efficient
Elastic schedule: the marginal value of each unit of pollution reduction remains
fairly constant.
Intuitively, when marginal social benefits are elastic, a change in cost has a big
effect on the optimal amount of pollution reduction. Therefore, a cap-and-trade
system (which fixes the amount of allowable pollution) deviates substantially
from the new efficient level
When marginal social benefits are elastic and costs are higher than expected,
neither cap-and-trade nor an emissions fee is perfectly efficient. Cap-and trade
achieves too much pollution reduction and an emissions fee achieves too little
pollution reduction. However, an emission fee is more efficient
14)
Figure 5.11. demonstrates the efficiency implications of using cap-and-trade
versus an emission fee when costs are higher than expected and marginal social
benefits are inelastic. Figure 5.12 does the same thing under the assumption of
elastic marginal social benefits. Now consider the case where marginal costs turn
out to be lower than anticipated. For both cap-and-trade and an emission fee,
show whether there is too much or too little emissions reduction. Which
approach is more efficient when marginal social benefits are inelastic and when
they are elastic?
If marginal costs turn out to be lower than anticipated, cap-and-trade achieves
too little pollution reduction and an emissions fee achieves too much pollution
reduction. With an inelastic marginal social benefit function, cap-and-trade is not
too bad from an efficiency standpoint, while an emissions fee causes pollution
reduction to be much greater than the efficient level when marginal cost is lower
than anticipated. When marginal social benefits are elastic, the opposite is ture
Additional Question
Quantum computing is a revolutionary method of performing calculations far
beyond the capabilities of common binary computing. Although development of
this technology is in its infancy, the prospects of its application in industries such
as business, defense and security is promising. The research that has led to this
innovation as well as current development is primarily but not exclusively
financed by government agencies.

Would a typical neoclassical economist support the government funding of

quantum computing? Why (not)?