Question: 1. Consider the market for energy, where power plants burn fossil fuels to produce energy, resulting in emissions that negatively impact the health of the surrounding community.
a. Illustrate the situation graphically. Identify any deadweight welfare loss and explain why the market is no longer effective at allocating resources in an efficient manner.
b. Illustrate how a tax on the producers or consumers can correct the externality, leading to an efficient outcome.
2. Consider the market for education, where more informed individuals have positive external impacts on other members of society.
a. Illustrate the situation graphically. Identify any deadweight welfare loss and explain why the market is no longer effective at allocating resources in an efficient manner.
b. Illustrate how a subsidy on the producers or consumers can correct the externality, leading to an efficient outcome.
3. Write out the Law of Demand and the Law of Supply. For each, identify the determinants of demand and the determinants of supply, and indicate how changes in those determinants shift the respective curves.
4. Given the products below and the events that affect them, indicate what happens to demand, supply, equilibrium quantity, and equilibrium price in a competitive market. Identify the determinant of demand and supply that causes the shifts and illustrate them graphically.
(a) Calculators. More schools require students to buy and use calculators:improved productivity shortens the time it takes to make calculators.
(b) Gasoline. Oil production declines due to a crisis in the Middle East: people take more car vacations and drive more.
(c) New homes. The average incomes fall as the economy moves into recession: the productivity of home construction workers and builders increases.
(d) Tobacco. The government cut its subsidy to tobacco farmers:more people quit smoking.