Kaylee M.

### Problem 3

Greater consumption of alcohol leads to more motor vehicle accidents and, thus, imposes costs on people who do not drink and drive.
a. Illustrate the market for alcohol, labeling the demand curve, the social-value curve, the supply
curve, the social-cost curve, the market equilibrium level of output, and the efficient level of output.
b. On your graph, shade the area corresponding to the deadweight loss of the market equilibrium. ($Hint$: The deadweight loss occurs because some units of alcohol are consumed for which the social cost exceeds the social value.) Explain.

Kaylee M.

### Problem 4

Many observers believe that the levels of pollution in our society are too high.
a. If society wishes to reduce overall pollution by a certain amount, why is it efficient to have different amounts of reduction at different firms?
b. Command-and-control approaches often rely on uniform reductions among firms. Why are these
approaches generally unable to target the firms that should undertake bigger reductions?
c. Economists argue that appropriate corrective taxes or tradable pollution rights will result in efficient pollution reduction. How do these approaches target the firms that should undertake bigger reductions?

Kaylee M.

### Problem 5

The many identical residents of Whoville love drinking Zlurp. Each resident has the following willingness to pay for the tasty refreshment:
a. The cost of producing Zlurp is \$1.50, and the competitive suppliers sell it at this price. (The supply curve is horizontal.) How many bottles will each Whovillian consume? What is each person's consumer surplus? b. Producing Zlurp creates pollution. Each bottle has an external cost of \$1. Taking this additional cost into account, what is total surplus per person in the allocation you described in part (a)?
c. Cindy Lou Who, one of the residents of Whoville, decides on her own to reduce her consumption of Zlurp by one bottle. What happens to Cindy's welfare (her consumer surplus minus the cost of
pollution she experiences)? How does Cindy's decision affect total surplus in Whoville?
d. Mayor Grinch imposes a \\$1 tax on Zlurp. What is consumption per person now? Calculate consumer surplus, the external cost, government revenue, and total surplus per person.
e. Based on your calculations, would you support the mayor's policy? Why or why not?

Yi Chun L.
Washington University in St Louis

### Problem 6

Bruno loves playing rock 'n' roll music at high volume. Placido loves opera and hates rock 'n' roll. Unfortunately, they are next-door neighbors in an apartment building with paper-thin walls.
a. What is the externality here?
b. What command-and-control policy might the landlord impose? Could such a policy lead to an inefficient outcome?
c. Suppose the landlord lets the tenants do whatever they want. According to the Coase theorem, how might Bruno and Placido reach an efficient outcome on their own? What might prevent them from reaching an efficient outcome?

Kaylee M.

### Problem 7

Figure 4 shows that for any given demand curve for the right to pollute, the government can achieve the same outcome either by setting a price with a corrective tax or by setting a quantity with pollution permits. Suppose there is a sharp improvement in the technology for controlling pollution.
a. Using graphs similar to those in Figure 4, illustrate the effect of this development on the demand for pollution rights.
b. What is the effect on the price and quantity of pollution under each regulatory system? Explain.

Kaylee M.

### Problem 8

Suppose that the government decides to issue tradable permits for a certain form of pollution.
a. Does it matter for economic efficiency whether the government distributes or auctions the permits?
Why or why not?
b. If the government chooses to distribute the permits, does the allocation of permits among firms matter for efficiency? Explain.

Kaylee M.