Assignment A

Choose ONE of the following assignment topics. Answer each question (1, 2, 3) separately, rather than answering the question as one single essay.

This article refers to a new book „Breaking the Sheep?s Back" by Charles Massey, a wool grower and Merino ram breeder at Cooma, in NSW.

"... the Australian Wool Corporation (AWC) and the Wool Council of Australia ... were given the power by the Labor Government in the mid-1980s to set the floor price. Mr Massy claims this floor was used to drive up prices to artificial and unsustainable levels, which eventually bought about the demise of the scheme. The crash could only be described as Australian agriculture's greatest financial disaster. The legacies of this crash in 1991 were an over- supplied wool market, which it appeared could only be corrected by shooting sheep, a floundering market, a stockpile of 4.7 million bales and an industry debt of $2.7 billion, not to mention the on-farm debt racked up by farmers and property investors who had counted on the floor price continuing into the 1990s."

Assignment parts:

1. According to this quote, the wool market had a price floor from the mid 1980s to the late 1990s. What does this mean and why did the Australian government impose this? Include a correctly labelled supply and demand diagram in your answer.

2. What is the downside to having a price floor in any market in general and in the wool market in particular?

3. Instead of imposing a price floor in the wool market, what one other option could the Australian government have chosen? Use a correctly labelled supply and demand diagram to demonstrate the price and quantity effects of this.

Assignment B

"With roughly 38,116,000 inhabitants and 383,000 km of road, 662 km of highways and 19.5 million of vehicles (383 vehicles per 1.000 inhabitants), Poland experiences 49,500 road crashes per year. Current statistics show an average of 5,582 persons killed and 63,000 persons injured year. That translates to roughly 15 persons killed per 100,000 inhabitants (11 persons killed per 100 road crashes) ... The problem is exacerbated by the relatively poor condition of Poland?s road infrastructure, insufficient protection of vulnerable road users, high rates of speeding and alcohol use, and insufficient use of protective devices."

In the above paragraph, the market for petrol is shown to contain a negative consumption externality.

(Note that buying/consuming a car has no externality; the externality arises once the car is being used.)

Refer to the above article, your textbook and other resources to answer these questions. Assignment parts:

1. What is the negative consumption externality described in this quote? Show this externality on a correctly labelled demand and supply diagram for the petrol market.

Identify the private equilibrium, price and quantity, and the social equilibrium, price and quantity.

2. With reference to your diagram, describe the tax solution to this externality. Explain how a tax will reduce the externality in the petrol market.

3. Instead of imposing a tax in the petrol market, what one other option could the Polish government choose? Use a correctly labelled supply and demand diagram to demonstrate the price and quantity effects of this option. (Note: the quote refers to issues other than petrol consumption.)