Please answer all questions. To get partial credit for incorrect answers, please show your work. To get full credit, properly label all graphs where appropriate.
The assignment has 6 points.
What type of externality is being described? In the absence of any government intervention, how much X is produced? What is the social efficient level of production of X? What is the gain to society involved in moving from the inefficient to the efficient level of production? Please draw a graph that shows these two points of production as well as the deadweight loss. Suggest an approach that the government could take that could lead to the efficient level. How much would such an approach cost or benefit government in the form of increased government tax revenues or increased government costs?
2. The private marginal benefit for commodity X is given by 50-5X, where X is the number of units consumed. The private marginal cost of producing X is constant at $10. For each unit of X produced, an external benefit of $5 is imposed on members of society.
What type of externality is being described? In the absence of any government intervention, how much X is produced? What is the social efficient level of production of X? What is the gain to society involved in moving from the inefficient to the social efficient level of production? Please draw a graph that shows these two points of production as well as the deadweight loss. Suggest an approach that the government could take that could lead to the efficient level. How much would such an approach cost or benefit government in the form of increased government tax revenues or increased government costs?
3. Mary and Sue value a town's various summer firework presentations differently. Mary's demand for the public good is: P = 70 - 10Q. Sue's demand for the public good is: P = 210 - 50Q. The marginal cost of providing fireworks is $100. What is the socially optimal amount of summer firework presentations? Calculate the share of the tax burden for both Mary and Sue (in percentage terms) for fireworks presentations based on Lindahl pricing? Calculate the share of the tax burden for both Mary and Sue (in percentage terms) based on an equal share of the cost. Assume Mary earns $70,000 and Sue earns $30,000, calculate the share of the tax burden for both Mary and Sue (in percentage terms) based on ability to pay. Finally, who is the greater fireworks enthusiast and why?