Externalities and property rights

For each of the following methods of financing radio and television programs, indicate how the resulting structure of programs differs from the optimum: and under what conditions, if any, it would be an optimum. In interpreting “optimum”, assume that the only consideration is direct private benefit from the programs; neglect distributional effects, i.e., treat it as a purely allocative problem; and assume that there are no such public issues involved as “education” or “indoctrination”. On the technical side, assume throughout that there are a narrowly limited total number of frequencies or channels available in any one area. Make your answer as definite as possible in terms of the kind of people whose tastes are or are not catered to appropriately, the kinds of programs that are too numerous or too sparse, etc. In answering the question, assume throughout that it is possible without cost to know exactly the number and kind of people who listen to each program.

The existing U.S. method of selling time to advertisers.

Imposition of an annual license tax or fee on each set; auctioning off of time to private program producers; compensation of these producers by giving to each a share of the total tax collection equal to the fraction of total listener time devoted to his programs. Assume that advertising is forbidden.

Some mechanical method whereby a subscriber can receive a particular program only if he pays through a coin-box arrangement for that particular program. The programs are to be provided by private producers who receive the payments, who buy time on the stations, as in the preceding case, and who can determine the amount charged for the programs they produce. Once again, assume that advertising is forbidden.

Outline the economics of the fishing industry. What resemblance, if any, do you see between the economics of the fishing industry under conditions of competition and the economics of monopolistic competition.

In Ronald Coase’s celebrated article on the nature of social cost the first example concerns the externality imposed by a cattle ranch that is next to a corn farm. The cattle can wander into the corn farm and eat some of the corn. This increases cost to the corn farmer and imposes an externality on him. Construct a formal analysis of the following situation:

(i) Let there be two firms such that the output of each firm is an “input” in the production function of the other. Let the other inputs be of the same kind, say, labor and capital. Let the output prices be given and let the input prices be given. Derive the profit maximizing solution for the two firms.

(ii) Give a precise measure of the externality and show that the solution in (i) does not depend on who pays whom.

(iii) Under what conditions will the dollar amount of the externality be proportional to the output of the other firm?

There has recently been renewed interest in the social optimality of various devices for the public regulation of pollution. Among popular proposals to deal with the problem: emission taxes, subsidies for pollution control, transferable rights to emit pollutants, maximum limits on pollution discharges from each source. Assume that the optimality conditions for public regulation have been met. Evaluate the relative efficiency of these four devices and any others you wish to add to the list.

It is argued in connection with the development of underdeveloped countries that basic industries such as steel should be developed by the government, since private investors will neglect the external economies brought to other industries by low-cost steel, and therefore will underinvest. Evaluate this argument. For what general class or classes of cases is the argument correct?

Assume the following simple world, in which you are asked to determine the optimum rate of automobile accidents.

The only type of accident which occurs is that a car may run into a house. The damage is then always $200.

The probability of an accident will be greater,

…the faster automobiles are driven

…the closer houses are set to the highway.

Assume explicitly any additional information you need to define the socially optimum accident rate. What mechanism, if any, could you design to achieve it?

Answer the following True, False, or Uncertain and explain your answer briefly. Your score depends on your explanation.

In a free market economy, all consumers participate equally in determining what will be produced.

A free market economy gives ample incentives to conserve natural resources provided that it is clear who owns each unit of the resources.

The cross-elasticity of demand between substitutes is positive.

If two linear demand curves each intersect the price axis, (q =0) the one that has the higher intercept is more elastic at this quantity.

An increase in the price of beef will increase the demand for pork and decrease the demand for beef.

If the market for eggs is in equilibrium an increase in supply will cause only a small change in price.

The elasticity of demand for oranges is greater in absolute value than the elasticity of demand for fruit.

Indicate whether each of the following statements is TRUE, FALSE, or UNCERTAIN. In each case write a few sentences explaining your answer. Your grade will be determined by your explanation.

It is immediately obvious that if the firm has any significant degree of monopoly power, sales maximization would be better for the rest of the economy than profit maximization.

When a firm increases its price because its raw material costs have risen, the buyers accept the price increase more readily.

If A and B are produced in fixed proportions and consumed in fixed proportions, one of the two will be free.

Marshall asserts that the rents of different qualities of agricultural land will approach equality as the economy grows in population and wealth.

An industry whose output is increasing cannot be making negative profits.

The prohibition on environmental pollution by (say) a factory cannot increase national income.

A competitive industry is more likely to cartelize when the probability of expropriation increases.

Regulation of a competitive industry by the government will decrease the probability of cartelization.

In the social security systems of most countries, the age of retirement after which old age pensions are “payable” is lower for women than for men (usually 60 as compared with 65 years of age), even though on the average women live significantly longer than men. This is a clear case of discrimination against men, which should be protested by the Men’s Liberation Movement.

The U.S. personal income tax system allows married couples to “split” their aggregate income equally and pay tax on the results at the same rates as single people would. This is a clear case of discrimination in favor of heterosexuality that should be vigorously protested by the Gay Liberation front.

If the elasticity of supply is less than unity, and the elasticity of substitution in production greater than unity, a fall in the price of a factor must increase the demand for it.

Labor can be “Exploited” only if there is monopoly in the product market.

Suppose the traffic department would like to enforce parking regulations in an efficient way. Assume that each person has the choice of parking illegally or legally; the latter costs X dollars per “day” and the former, if one is caught, causes a fine equal to F dollars per time caught.

Assume first that the sole aim of the traffic department is to discourage illegal parking at minimum cost. Assume also that all drivers simply try to maximize expected money income. How frequently should the traffic department inspect parking in order to achieve its aim?

If all drivers maximized expected utility and had diminishing marginal utility of income, (but there is no utility or disutility from disobeying the law), how would this affect your answer? If they had increasing marginal utility of income?

Suppose the traffic department received all the fines and desired just to maximize its expected income. How would your answer to 1. be affected?

How does your answer to a. and c. depend on F, the size of the fine, and X, the cost of legal parking?

Many shopping centers provide zero price parking for their clients. Some have argued that such policy leads to inefficient location of resources since to insure sufficient parking for center clientele space must be provided for “freeloaders” who shop at stores near the center. Who gains from the zero price parkings? How? Would it be economically more efficient for centers to allocate parking space by price?

Give brief (a sentence or two) comments to the following:

(a) Is life priceless? What evidence can you offer to support your contention?

(b) What do the concepts of externality and property rights have to do with allocation of resources?

(c) A jet plan can fly across the U.S. three hours faster than a propeller plane. Which is more efficient?

Give brief answers to the following:

(a) “Fishing in the ocean leads to too many resources being devoted to fishing.” Evaluate, but first explain what is meant by “too many.”

(b) The tendency for married couples with small children (who require baby-sitting) to spend more on entertainment when they do go out than married couples without children. Why?

(c) Laissez-faire capitalism encourages deceitful advertising, dishonesty and faithlessness. Comment.

(d) The function of assigned property rights is that of internalizing externalities. Comment.

Atomistic markets are supposed to permit the achievement of Pareto optimality where externalities are absent. Explain the meaning of this statement. Do externalities offer unambiguous proof of market inefficiency or is it possible for externalities to be consistent with market efficiency? Explain.

Perfect (pure or price-takers) markets is supposed to permit achievement of Pareto Optimality, where externalities are absent. Explain the meaning of this statement. Do externalities offer unambiguous proof of market inefficiency or is it possible for externalities to be consistent with market efficiency?

Oysters settle and grow in shallow water in areas known as oyster beds. In some states (private property states), most oyster beds are privately owned and can only be exploited with the permission of the owner. In other states (common property states), most oyster beds are the common property of all and may be exploited by anyone. Investigators found that (1) prices of oysters were lower in common property states than in otherwise similar private property states, (2) oysters were marketed earlier (oysters were smaller) in common property states. Explain why. Which arrangement is preferable and why?

Price-takers markets are supposed to permit the achievement of Pareto Optimality where externalities are absent. Explain the meaning of this statement. If externalities exist will optimality necessarily be denied? Why?

Evaluate the following: The way to get people to keep future generations in mind as they make current decision concerning the use of scarce natural resources is to allow them to hold private property rights over these resources which they can transfer. How would your answer differ if transfer rights were denied?

Why is most productive activity carried out by firms rather than by individuals who contract mutually with one another?

Write a very short comment on each of the following questions:

(a) “Fishing in the ocean leads to too many resources being devoted to fishing.” First explain what is meant by “too many.”

(b) Tourists in foreign countries pay higher prices for a given item than do the indigenous residents.

(c) Mechanics tend to charge women higher prices for a given emergency repair than that charged men.

(d) Why might it be legal for anyone to give free medical advice but if he is going to charge for medical advice he needs a license.

(e) “Thou shalt not plow with an ox and an ass together.”

“Perfect (price-takers’) markets is supposed to permit achievement of Pareto Optimality, where externalities are absent.” Explain the meaning of this statement. If externalities exist will the optimality be denied? Why?

Using elementary economic theory, write short explanations to the following statements:

(a) Tourists must be more careful buying Maine lobsters in Maine than buying Maine lobsters in Philadelphia.

(b) There are proportionally fewer members of minority groups employed in regulated industries than in unregulated industries.

(c) Fishing in the ocean leads to too many resources being devoted to fishing. (First explain what is meant by too many.)

Why do shopping center developers try to purchase as much of the adjacent land as possible?

It is sometimes argued that since future generations are not in any position to cast dollar votes (or for that matter any other vote) in influencing the saving-investment decisions of the current generation, there will be under-provision of the needs of the future because of “selfishness” on the part of the current generation. The rapid exploitation and even destruction of may of our natural resources are often cited as evidence for this contention. On the other hand, there is the indisputable evidence from modern history that each successive generation had been left richer than its predecessor. Comment and include the reason why present generations enrich future generations; what is the quid pro quo? (Remember that in this exchange future generations have not done anything for present generations.)

Evaluate the following: The most effective way to get people to keep future users of scarce natural resources in mind as they make their current decisions on use is to allow them to hold private property rights over these resources which they can transfer. How would your answer differ if transfer rights were denied?

Assume that you are a member of a minority group in some country and have reason to doubt that your property rights would be enforced and respected in the community.

(a) What forms of capital would you invest in?

(b) What kinds of skills would you encourage for your children?

(c) Do you know of any evidence of such actual behavior by minority groups?

In the interest of conservation it has often been argued there must be government regulation of the extraction of natural resources such as timber and government regulation to protect endangered wildlife. Explain why and how, in a free market economy, these resources are already regulated and comment on the pitfalls to either form of regulation.

Evaluate: “The fact that some airplanes collide is evidence there is ‘too little air traffic control’.” (Be sure to explain what too little might mean.)

Explain the concept of externality. What does it have to do with the efficient allocation of resources?

Private property rights lead to one kind of resource allocation while communally held property rights lead to another. Explain. You may use examples.

Evaluate the following: The way to get people to keep future generations in mind as they make current decisions concerning scarce natural resources is to allow them to hold private property rights over these resources, which they can transfer at death to their heirs.

(a) Why will a person who has transferable (saleable) property rights in a business for which he is making decisions, be more influenced by the longer run effect of his decisions than if he did not have transferable property rights in the business?

(b) Explain the influence that transferable property rights versus non-transferable property rights, has on individual decision making.

A large lake is stocked with excellent fish, but no one owns the fish or the lake. Only by catching the fish can you acquire ownership of the fish.

(a) What do you think will be the average age of fish caught as compared to the age of fish in a privately owned lake?

(b) Which system will induce over fishing in the sense that more resources will be devoted to catching fish than the extra fish caught are worth? Why?

What is the problem with common property resources?