Question #1: (20 marks)
The market-demand function, based on the value of marginal private benefit (MPB) for vaccination (Q), isPM = 100 – Q, where PM is the dollar-price per vaccination.
Assume that there are positive externalities from vaccination. The social demand function, which includes private benefits and externalities, isPS = 140 – Q, where PS is the social dollar value per vaccination.
The market supply curve (based on marginal cost) is a horizontal line with MC = AC = $40.
Find the following equilibrium solutions:
Market equilibrium quantity (QM) =
Total net benefit at the market equilibrium quantity = $
Socially optimal quantity (QS) =
Total net benefit at the socially optimal quantity = $
Question #2: (60 marks)
Each numerical solution is worth 2 marks.
Consider a single source of emissions in a given community.
The community’s marginal damage cost function is MDC = 4E
The marginal abatement cost function is MAC = 20 – E
(a) Assume that no abatements are carried out. In other words, abatement (A) is zero and MAC is zero.
Find the following:
Max E = A =
Total abatement costs = $
Total damage costs = $
Aggregate costs = $
(b) Find socially optimal E (based on MDC = MAC rule) and associated values.
E = A =
Total abatement costs = $
Total damage costs = $
Aggregate costs = $
(c) Consider Coase Theorem and use MDC = MAC condition.
Assume that the property rights belong to polluters.
E = A =
Price per unit of A =$
Total payments from victims to polluters = $
Net gain to polluters = $
Net gain to victims = $
(d) Consider Coase Theorem. Assume that the property rights belong to victims.
E = A =
Price per unit of E = $
Total payments from polluters to victims = $
Net gain to polluters = $
Net gain to victims = $
(e) Instead of Coase Theorem, consider socially optimal tax-rate per E.
E = A =
Tax-rate per E = $
Total tax-payments = $
Total abatement costs = $
(f) Instead of socially optimal tax-rate per E, consider socially optimal subsidy-rate per A.
E = A =
Total subsidy payments = $
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