Unit 6: Market Failures
Problem Set #6 Points Distribution
1. Public Goodsa. Characteristics • 1 Point- Identifies non-excludability
• 1 Point- Defines non-excludability
• 1 Point- Identifies non-rivalry (shared consumption)
• 1 Point- Defines non-rivalry
• 1 Point- Clear example
b. Public Sector• 2 Point- The government (Public sector) must provide the good to
everyone
• 1 point- If left up to the free market not enough would be produced
• 2 Point- Explains that Free Riders make profit impossible
2. Externalitiesa. SUVs and Negative externalities (10 Points)
i. 1 Point –first clear externalities explaining who pays spillover costs
1 Point- second clear externality explaining who pays costs
ii. 1 Point- Correct graph with two S curves labeled MSC and MPC
1 Point- Free market P and Q
1 Point- Socially optimal P and Q
iii. 1 Point- MSC>MSB
1 Point- Good is overproduced
1 Point- Free market fails to produce because it doesn’t include spillover cost
iv. 1 Point- Tax
1 Point- Graph shows left shift in supply
2b. Externalitiesb. Parks and positive externalities (10 Points)
i. 1 Point –first clear externalities explaining who pays spillover benefits
1 Point- second clear externality explaining who pays benefit
ii. 1 Point- Correct graph with two D curves labeled MSB and MPB
1 Point- Free market P and Q
1 Point- Socially optimal P and Q
iii. 1 Point- MSC<MSB 1 Point- Good is underproduced 1 Point- Free market fails to produce because it doesn’t include spillover benefits
iv. 1 Point- Subsidize (specify producer or consumer) 1 Point- Graph shows right shift in supply (subsidy to producers) or right shift in demand (subsidy to consumers)
3. Anti-Trust Lawsa. Purpose
• 2 Points- To promote competition and prevent monopolies
• 1 Point- Monopolies charge too much and provide too little (higher price, lower quantity)
• 1 Point- Monopolies are not productively efficient
• 1 Point- Monopolies are not allocatively efficient
b. Tax or Subsidize
• 1 Point- They should subsidize
• 2 Point- Subsidizing lowers MC curve so firms make more
• 2 Point- Taxing increases MC so they make less
3. Anti-Trust Laws
c. Microsoft
• 2 Points- Quality Summary
• 2 Points – Identify what they did to limit competition
• 1 Point- The student obviously read and understood the section
4a. Redistribution of Income
a. Distribution of Income: Types of Taxes
1 Point- Defines Progressive (as income goes up, percent paid goes up)
1 Point- Defines Regressive (as income goes up, percent paid goes down)
1 Point- Defines Proportional (equal percentage of total income)
2 Point- Quality Examples (income, sales tax, property tax)
4. Redistribution of Incomeb. Lorenz Curve
• 2 Point- The given average doesn’t show how money is distributed or reflect individual’s standard of living.
• 1 Point- The poor and extremely rich skew the data
• 2 Point- Government compares perfect equality to actual equality
• 2 Point- The further the Lorenz curve is from the line representing equal distribution, the further the society is from income equality
• 3 Point- Lorenz Curve clearly graphed
FRQ#1
6 Points
FRQ#2
8 Points