ECONOMICS FOR PUBLIC ADMINISTRATORS PROBLEM
Problem A -
Healthy Candy is located in the City of Atlanta and produces chocolate candies for international consumption. In the course of candy production, Healthy Candy releases pollution as a negative externality into the atmosphere of the City of Atlanta. Some of the pollution-related problems include skin cancer, contamination of drinking water, breathing epidemics, birth defects, and offensive odor. Sadly, Healthy Candy does not do anything to bear the costs associated with the health and ecological problems Atlanta residents suffer. Interestingly, Healthy Candy believes that Atlanta residents do not know about the problems and then leaves Atlanta residents to pay for the health and ecological problems they suffer from the pollution generated in the production of candies. What a rip-off against Atlanta residents!!! Healthy Candy smiles home with huge profits. Healthy Candy's customers worldwide feel satisfied with Healthy Candy's products and organize international events to praise the incredible quality of Healthy Candy's products. Alas, Atlanta residents apparently turn out to be victims in the process of production and consumption of Healthy Candy's products.
Suppose that you are a public administrator in the City Government of Atlanta, have trained in Economics for Public Administrators from Clark Atlanta University, and are working with the following marginal benefits and costs for Healthy Candy's chocolate candies, where Q is thousands of chocolate candy boxes and P is price per chocolate candy box:
MPB (Marginal Private Benefit) = 720 - 0.4Q (benefits to individual Atlanta consumers of Healthy Candy's products).
MPC (Marginal Private Cost) = 40 + 0.3Q (costs of producing candies by Healthy Candy).
MEB (Marginal External Benefit) = 0 (an external benefit is a positive externality: candy production benefits to the City of Atlanta may include a healthy environment and healthy residents in Atlanta. In the current context, external benefits are zero).
MEC (Marginal External Cost) = 0.5Q (an external cost is a negative externality: health and ecological problems associated with the pollution generated by Healthy Candy that affect Atlanta residents and environment).
1. With your understanding of "Lectures 4 and 5 Market Failure and Solution to Market Failure" and the assigned chapters for Lectures 4 and 5,
i. Find the competitive equilibrium, Qc and Pc.
ii. Find the efficient equilibrium, Qe and Pe.
iii. Show (a) the competitive equilibrium and (b) the efficient equilibrium in the same graph that is properly labeled.
2. Suppose that Healthy Candy owns the rights to pollute the atmosphere of the City of Atlanta and is negotiating with concerned public administrators in the City Government of Atlanta to generate less pollution in the production of candies.
i. For the 650th chocolate candy box, determine the range within which a payment would be acceptable to both Healthy Candy and the concerned public administrators. Show in the graph for 1(iii) above (a) the 650th chocolate candy box, (b) the price Healthy Candy would take, and (c) the price the concerned public administrators would pay on behalf of Atlanta residents.
ii. In 200-300 words, clearly explain the price range associated the 650th chocolate candy box.
iii. In 200-300 total words,
a. creatively explain Healthy Candy's chocolate candies as a private good and a public good,
b. skillfully explain pollution from the production of candies as a public good, and
c. critically discuss how pollution from the production of candies can be reduced to a manageable level without government intervention.
Problem B -
Assume that two electricity plants, Firm 1 and Firm 2, release sulfur dioxide (SO2) in Atlanta that exceeds the emissions standard. To meet the standard, 30 units of SO2 must be abated in total. The two firms face the following abatement costs:
MAC1 (Marginal Abatement Cost for Firm 1) = 16 + 0.5A1
MAC2 (Marginal Abatement Cost for Firm 2) = 10 + 2.5A2
where costs are measured in thousands of dollars.
With your knowledge of "Government Intervention or Command and Control Approach" in Lectures 4 and 5 Market Failure and Solution to Market Failure" and on pages 90 to 95 in Chapter 4 in Callan and Thomas on Conventional Solutions to Environmental Problems:
1. (a) Prove that a uniform standard will not meet the cost-effectiveness criterion.
(b) Show your results in a graph that is properly labelled.
(c) In 200-300 words, draw a conclusion on why the uniform standard will not meet the cost-effectiveness criterion.
2. (a) Determine how the abatement levels should be reallocated across the two firms to minimize costs.
(b) Show your results in a separate graph that is properly labeled.
(c) In 200-300 words, draw a conclusion on how the abatement levels should be reallocated across the two firms to minimize costs.