### What is the market solution

##### Reference no: EM131726

1. The risk treatment in the bene.t-cost analysis assumes risk neutrality. This assumption cannot be justi.ed for large projects.

2. In a market with positive externalities, monopolies can be better than competitive .rms rom the society.s point of view.

3. The supply of a good in a private market is given by Q = -2 + P. However, the production process of this good is damaging the environment. Given the social marginal cost MCS = 3 + 2Q you have found that the socially optimal quantity (i.e., when taking the externality e¤ect into consideration) of that good is Q_ = 5 units. Therefore, a corrective measure against this negative externality is a Pigouvian tax of tP = \$1.

4. A property rights system that satis.es exclusivity and enforceability does not guarantee good maintenance of the resources.

Part 2: Analytical questions. Do the problems in the order given.

1. The demand for and supply of crude oil from Alberta.s oil sands are given by P = 120 - 0:5QD and P = 1:5QS + 10. Although these equations express the private marginal bene.ts and private marginal costs, they fail to incorporate the external costs associated with the production process and consumption of oil. These external costs are estimated to be given by MCE = 5 + Q.

(a) What is the market solution (market price and quantity)? What is the total surplus of the society under the market solution?

(b) What is the socially optimal solution (optimal quantity and price)? What is the total surplus of the society under the socially optimal solution?

(c) What is the optimal e­ uence tax that will lead the market on producing the socially optimal quantity?

2. The following equations describe the willingness to pay of Amanda, Brian, and Carol for a non-excludable and indivisible good:

 Amanda.s WTP: PA = 5 - QA Brian.s WTP: PB = 8 - 2QB Carol.s WTP: PC = 4 - QC

The marginal cost function is

MC = 3 + 3Q

(a) What is the market demand for this public good? What is the socially e¢ cient provision of this public good?

(b) What are the two possible reasons why the market fails to provide the socially e¢ cient quantity of this public good? Fully explain your answer.

3. An oil re.nery is considering three alternative production processes. Although the resulting bene.ts will be the same (the resulting gasoline, diesel fuel, asphalt base, heating oil, kerosene from the three di¤erent methods are of the same quality and quantity), the marginal costs associated with each method are di¤erent. More speci.cally, the marginal cost of method 1 is MC1 = 28, the marginal cost of method 2 is MC2 = 12 + q2, and the marginal cost of method 3 is MC3 = 2q3.

(a) If the factory wants to produce 100 units in total, how many units will be produced using each di¤erent method?

(b) Repeat part (a) when the factory wants to produce 18 units in total. (10 marks)

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