(solved) Economics Theory - PDF

Added on - 21 Apr 2020

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Running head: ECONOMICSEconomicsUniversity NameStudent NameAuthors’ Note
2ECONOMICSTable of ContentsAnswer to Question 1:................................................................................................................2Answer to Question 2:................................................................................................................4Answer to Question 3:................................................................................................................7Answer to Question 4:..............................................................................................................12Answer to Question 5:..............................................................................................................14References................................................................................................................................16
3ECONOMICSAnswer to Question 1:Answer to Question 1(a):In an unregulated marker, the quantity that would be traded= 700 unitsSocially optimal production level refers to the quantity produced in this specific equilibriumthat occurs where society’s marginal cost is equal to the society’s marginal benefit.In this case, the social optimal level of production=500 unitsDeadweight loss can be referred to as the lost welfare due to market failure or elseintervention.Calculation of deadweight loss associated with the unregulated outcome=1/2*(700-500)*(1.50-1.10)=40Answer to Question 1(b):In this case, the government has finally decided to impose excise tax in order to correct theexternality. In case if a good has a particular negative externality, without the imposition oftax, then there will be excess consumption (in this case Q1=Demand =Supply) sinceindividuals can ignore external cost. With tax on negative externality, the overall output willdecline from 700 kg to 500 kg. Therefore, per kilogram rate of tax is 1.10 (Ehrenberg &Smith, 2016).Reason for introduction of excise tax for correction of the externality
4ECONOMICSAs rightly indicated byCanto et al., (2014), excise taxes imposed on negative externalitiescan make consumers or else producers to pay the entire social cost of the particular good.Essentially, this decreases consumption and generates a more socially efficient result. Excisetax also needs to be imposed on the good that is equal to the external MC.Answer to Question 1(c):An economic advisor has suggested to the particular government that allotting property rightscan be considered as an alternate solution to the pollution externality. Essentially, marketbased solutions also attempt to manipulate forces of market for the purpose of reduction ofexternality by way of exploiting mechanisms of price. Again, a market based way out is toextend rights of property in order to ensure that the third parties can negotiate with specificindividuals else wise corporations that generate externality. Essentially, the famous BritishEconomist as well as Nobel Prize winner Ronald Coase argued that institution of propertyrights would deliver an effectual solution to the difficulties of externality. However, as longas a specific party can institute a property right, there can be a bargaining procedure that inturn can lead to a contract in which externalities can be considered.Baumol & Blinder (2015)asserts that the Coase theorem asserts that even when different externalities subsist, the
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