Micro Topic 6.
1
Socially Efficient and Inefficient Markets
Part 1 - Check Your Understanding- The graph
shows the marginal benefit (MB) and marginal
cost (MC) of commercial fishing licenses. Use the
graph to answer the questions.
1. What is the optimal quantity of fishing
licenses? Explain.
2. Assume that the government issues only 30
licenses. Use numbers from the graph to explain
why this is inefficient.
3. Calculate the deadweight loss if only 30
licenses are issued. Show your work.
4. Assume instead that the government issues 80
licenses. Use numbers from the graph to explain
why this is inefficient.
5. Calculate the deadweight loss if 80 licenses are issued. Show your work.
6. Assume that a new environmental study reveals that commercial fishing boats cause significant water
pollution. Environmentalists and economists agree that the additional water pollution can be cleaned up if
there is an additional $40 fee for each license. What is the new optimal quantity of fishing licenses?
Explain.
7. Factoring in the cost of the water pollution, calculate the deadweight loss if 50 licenses are issued.
Show your work.
8. Assume that instead of charging the $40 fee, the licencing agency decides to address the pollution
problem by limiting that number of fishing licences to 10. Use numbers from the graph to explain why this
is an inefficient outcome. Explain your answer.
nswer the questions.
Part 2 - Stretch Your Thinking- A
9. Explain why it is unlikely that any one commercial fishing company would voluntarily pay to clean up
water pollution caused by their boats.
10. Explain why policymakers should examine costs and benefits when addressing environmental
concerns rather than adopt policies designed to stop pollution. Fully explain your reasoning.
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Micro Topic 6.2
Externalities
Part 1 – Check Your Understanding- Read the following passage from the National Fire Protection
Association regarding consumer fireworks and answer the questions below.
“Fireworks start an average of 18,500 fires per year, including 1,300 structure fires, 300 vehicle
fires, and 16,900 outside and other fires. These fires caused an average of three deaths, 40
civilian injuries, and an average of $43 million in direct property damage.” ([Link])
1. Fully explain why consumer fireworks can be considered an example of a negative externality.
2. When the government is not involved, is the market price for consumer fireworks higher, lower, or
equal to the socially optimal price? Explain.
3. Identify two different government policies that could reduce fires and injuries caused by fireworks.
4. In 2017, the state of Pennsylvania imposed an additional 12% sales tax on consumer fireworks.
Identify one specific behavior that could limit this policy’s effectiveness in preventing fires and
injuries.
Part 2 – Graph It- The graph below shows an unregulated market for high powered consumer fireworks.
Assume that each box of fireworks generates $40 of external costs on society and that the demand
equals the marginal social benefit.
5. Identify the equilibrium price and quantity
produced by the unregulated market.
6. Add a marginal social cost (MSC) curve to
the graph and identify the socially optimal
price and quantity.
7. At the quantity of 50 boxes of fireworks,
shade in the area of deadweight loss.
8. Assume that the demand for fireworks
suddenly became more inelastic. Would the
deadweight loss that results from the
unregulated market increase, decrease, or
stay the same? Explain.
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Micro Topic 6.2
Externalities
9. Assume that the government imposes a $20 per unit tax on fireworks. Does this policy eliminate
deadweight loss? Explain.
10. Assume instead that the government bans fireworks. Does this eliminate deadweight loss? Explain.
Part 3 - Making Connections- Read the following and use the graph to answer the questions.
“...with processed food and sweetened drinks becoming household staples. Even very low-income
communities are seeing rising rates of obesity, diabetes, cancer, and heart disease....There are
immense costs, in terms of lost productivity, lost wages, increased health expenditures, and a smaller
labor force....To tackle this health crisis, a new task force of well-known academics and advocates is
encouraging developing nations to treat candy and soft drinks as many of them treat alcohol and
cigarettes -and to tax them….”
[ Lowrey, Annie. “More Taxes and Less Death?” The Atlantic, Jan. 25, 2018.]
The graph to the right shows the market for
soda with the marginal social benefit (MSB),
marginal private benefit (MPB), and marginal
social cost (MSC).
11. Calculate the per unit dollar value of the
external cost when 30,000 cases of soda
are produced.
12. Calculate the per unit dollar value of the
external cost when 40,000 cases of soda
are produced.
13. Calculate the per unit dollar value of the
external cost when 50,000 cases of soda
are produced.
14. The MSC is often drawn parallel to the MPC
but in most real-world situations the MSC
increases at a faster rate. Using the
example of soda, explain why the per unit
external cost increases as more cases are produced.
15. Explain why it is difficult to accurately calculate the external cost of soda in the real-world.
16. Do you think that the government should regulate and tax soda like they do alcohol and cigarettes?
Fully explain your opinion.
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Micro Topic 6.2
Externalities
Part 1 – Check Your Understanding- Read the following passage from the Centers for Disease
Control and Prevention regarding flu shots and answer the questions below.
“...Recent studies show that flu vaccination reduces the risk of flu illness by between 40% and
60% among the overall population...flu vaccine prevents millions of illnesses and flu-related
doctor’s visits each year. For example, during 2016-2017, flu vaccination prevented an
estimated 5.3 million influenza illnesses, 2.6 million influenza-associated medical visits, and
85,000 influenza-associated hospitalizations.” ([Link])
1. Fully explain why flu shots can be considered an example of a positive externality.
2. When the government is not involved, is the market quantity of flu shots higher, lower, or equal to
the socially optimal quantity? Explain.
3. In addition to saving money on medical visits and hospitalizations, identify two additional external
economic benefits of flu shots.
Part 2 - Graph It- Graph the marginal private benefit (MPB), marginal social benefit (MSB), and
marginal social cost (MSC) for flu shots using the data in the table below, then answer the questions.
4. Identify the price and quantity
produced by the unregulated
market.
5. Identify the socially optimal price and quantity and shade in the area of deadweight loss.
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Micro Topic 6.2
Externalities
6. Assume that the government gives consumers a $0.40 per unit subsidy for flu shots, does this
policy eliminate deadweight loss? Explain.
7. Assume instead that the government gives producers a $0.80 per unit subsidy for flu shots, does
this policy eliminate deadweight loss? Explain.
8. Calculate the total dollar amount the $0.80 per unit subsidy from question #6 would cost. Explain
how you got your answer.
9. Rather than providing a subsidy, identify a different policy the government could use to achieve the
socially optimal outcome.
Part 3 - Making Connections- The graph below shows the market for smoke alarms with the marginal
social benefit (MSB), marginal private benefit (MPB), and marginal social cost (MSC).
10. Assume your friend says that installing a
smoke alarm in her house results in a
positive externality because the alarm
can save her life if there was a fire. Fully
explain why this is not an example of a
positive externality.
11. Calculate the per unit value of the
external benefit when 20,000 units are
produced
12. Calculate the per unit value of the
external benefit when 40,000 units are
produced.
13. Explain why the external benefit of
smoke alarms increases as more units
are produced.
14. Calculate the area of deadweight loss at the free market price and quantity.
15. Calculate the area of deadweight loss at the socially optimal price and quantity.
16. Calculate the per unit dollar amount the government could subsidize consumers to achieve the
allocatively efficient outcome. Explain how you got your answer.
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Micro Topic 6.3
Public and Private Goods
Part 1: Check for Understanding- Brazil hosted the 2014 FIFA World Cup and reportedly spent $3.6
billion US Dollars on twelve new and refurbished stadiums. The table below shows the estimated
capacity, cost, events per year, and total attendance for four of these stadiums four years after the World
Cup. Use the data in the table to answer the questions.
[Source: “Were the Billions Brazil Spent on World Cup Stadiums Worth It?.” FiveThirtyEight, June, 2014]
1. On average, how much did the Brazilian government spend on each fan that visited the Estadio do
Maracana in Rio? Explain how you got your answer.
2. Assume that each fan was willing to pay up to $200 for each event in the Arena Pantanal in Cuiaba.
Based on the monetary benefits and costs alone, should the government have built the stadium?
Explain your answer.
3. Which stadium above provided the most value to the citizens of Brazil? Use data to justify your
answer.
4. Which stadium above provided the least value to the citizens of Brazil? Use data to justify your
answer.
5. Identify one reason why the government might overspend when hosting the World Cup or the
Olympics.
6. Assume that a government official defends the spending on stadiums by pointing out that the
stadiums will be used for a long time and that building them created more jobs. Pick one of these two
claims and explain why it is not an economically sound argument.
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Micro Topic 6.3
Public and Private Goods
Part 2 - Practice : The city of Cliffordville is trying to determine how many public parks it would like to
build. The city is divided into the East side and the West side. The table below shows the taxes that
citizens on the East side and the West side are willing to pay for different quantities of parks.
7. Fill in the chart and calculate the marginal social
benefit (MSB) for all the citizens in Cliffordville.
8. Graph the MSB and marginal social cost (MSC) for
Cliffordville assuming that each park costs $50.
9. What rule should Cliffordville use to determine how many parks to build?
10. How many parks would the East side build if they received no money from the West side?
11. How many parks should the citizens of Cliffordville build? How did you get your answer?
12. Use the data in the table above to explain why Cliffordville should never produce a total of eight public
parks.
13. How many parks should the citizens of Cliffordville build if each park costs $90 to build?
Part 3: Stretching Your Thinking- Answer the following question.
14. In November of 2016, the voters of San Diego, California (USA) decided not to pay $1.15 billion for a
new football stadium. The football team subsequently moved to Los Angeles and the city no longer
has an NFL football team. Do you think that voters made the right decision? Fully justify your
answers.
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Micro Topic 6.4
The Effects of Government Intervention
Part 1: Check for Understanding- Read the quote below and answer the following questions
"If we will not endure a king as a political power, we should not endure a king over the
production, transportation and sale of any of the necessaries of life.”
- US Senator John Sherman, chief sponsor of the Sherman Antitrust Act of 1890
1. Senator Sherman compared monopolies to a king. Identify three reasons why unregulated
monopolies might be bad for society.
2. Despite antitrust laws designed to prevent monopolies, sometimes the government allows and
encourages monopolies to exist. Under what conditions might society prefer a monopoly to a
competitive market?
Part 2: Graph Practice- Use the graph below of a non-price discriminating natural monopoly to answer
the following questions.
3. Identify the unregulated profit
maximizing price and quantity.
4. Assume that the government
regulates this monopoly by
setting a price ceiling at the fair
return (break even) price. What
would be the price and quantity?
5. Does regulating this monopoly at
the fair return price increase or
decrease deadweight loss?
Explain.
6. Assume instead that the
government regulated this
monopoly by setting a price
ceiling at the socially optimal (or
allocatively efficient) price. What
would be the price and quantity?
7. Identify one advantage and one
disadvantage of regulating a monopoly at the socially optimal price.
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Micro Topic 6.4
The Effects of Government Intervention
Part 3: Graph Practice- Read the excerpt from and article that was written in December 2017 and
answer the following questions.
The Walt Disney Co. may be willing to wager $2.5 billion that its 11-figure deal with 21st Century Fox
will pass regulatory muster, but antitrust lawyers aren't so sure.
The companies expect the regulatory review and closing process to take up to 18 months, which will
likely include a thorough analysis of whether the combined entity could substantially lessen
competition in the marketplace.
That the Department of Justice is formally contesting AT&T's proposed $85 billion acquisition of Time
Warner could signal an uphill battle for Disney and Fox.
"The government went after a vertical merger involving AT&T," says Loyola Law School professor
emeritus Daniel Lazaroff. "They generally are viewed with more tolerance. Horizontal mergers are
viewed as the most threatening types of mergers for competition."
While some could argue the Time Warner deal is irrelevant because it presents different issues,
experts say it's not reaching too far to compare the two regulatory paths.
The entertainment content acquisition portion of the deal will likely be the primary focus of antitrust
scrutiny. Disney is buying Fox's film and TV studio, which includes 20th Century Fox, Fox Searchlight
Pictures and FX Productions, among other entities.
Leslie anticipates that the government will assess whether the combined Disney-Fox entity would have
unfair market power with regard to theatrical distribution. Would it be able to negotiate higher licensing
fees or longer runs for its films? "If you let the biggest player eliminate one of its bigger competitors,
that’s going to eliminate the leverage of the theaters to say no," he says.
8. According to this article, why might regulators and society be concerned about Disney purchasing
Fox?
9. The article states that government regulators will conduct a “thorough analysis” before letting this deal
go through. Identify specific information the regulators might consider to make their decision.
10. The article refers to “vertical mergers” and “horizontal mergers”. Research the difference online and
explain why “horizontal mergers” are more likely to be scrutinized by regulators.
11. Research online the outcome of this deal. Was Disney able to buy Fox? Why or why not?
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Micro Topic 6.5
Equality
ead the quote and answer the questions.
Part 1- Check Your Understanding- R
“Income inequality is troubling because, among other things, it means that many people in our
society don't have the opportunities to advance”- Ben Bernanke
1. Identify three different reasons why people in our society might not have the opportunity to advance.
2. Pick one reason from your answer above. Identify a specific policy that could address this issue and
explain why the policy would improve income mobility.
Part 2- Practice- Assume that Curve 2
is the Lorenz curve for Cliffordland.
3. If 80% of households earn 55% of
the income, what percent of income
does the richest quintile earn?
4. What percent of income does the
second richest quintile earn?
5. If the middle quintile earns 15% of
the income, what percent of income
does the second poorest quintile
earn?
6. Assume that Cliffordland adopts
policies designed to redistribute
income. How will these policies
affect Curve 2? Explain.
7. Explain why it is unlikely that Cliffordland, or any other country, will have a Lorenz curve like Curve 1.
Part 3- Practice- Use the chart to answer the following questions.
8. Which country has the most income inequality? How can you tell?
9. Given just this information, which country likely has the most
progressive income tax? Explain.
10. What is the difference between a country that has a Gini coefficient of 0
and a country that has a Gini coefficient of 1?
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