Unit 6: Market Failures

1. Unit 6: Market Failures Problem Set #6 Points Distribution

2. 1. Public Goods a. 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

3. 2. Externalities • 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

4. 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

5. 2b. Externalities b. 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

6. iii. 1 Point- MSC<MSB1 Point- Good is underproduced1 Point- Free market fails to produce because it doesn’t include spillover benefitsiv. 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)

7. 3. Anti-Trust Laws a. 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

8. 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

9. 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)

10. 4. Redistribution of Income b. Lorenz Curve • 2 Point- The given average doesn’t show how money is distributedor 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

11. 6 Points FRQ#1

20. 8 Points FRQ#2