Economics - law and economics
1. Good exterior home maintenance leads to higher property values throughout a neighborhood. Of course, the gains in property values must be balanced against the opportunity cost of time for those who do the maintenance. The information below applies to a particular residential neighborhood. The first two columns show a list of home maintenance tasks and how much each task would raise the total value of property in the neighborhood. (The gain in total value is spread evenly over the seven houses in the neighborhood, and everyone in the neighborhood knows and agrees upon the gain created by each task). The second two columns list the residents of the neighborhood, and the opportunity cost of a day of time for each resident. Each resident has 1 day available for maintenance work, and each task takes one day.
Tasks Total Increase in Property values Resident Opportunity Cost
Plant flowers in median $500 Pete $400
Install streetlights $1,000 Angela $1,000
Paint shutters $800 Kirk $2,000
Replace rusty siding $600 Ruth $100
Repair sidewalk $900 Sam $450
Plant trees $300 Beverly $300
Plant lilacs $200 Gertrude $250
Repair curbs $400
a. Construct and plot on a single graph the marginal benefit and marginal cost schedules for home repair tasks. (Hint: the horizontal axis of this graph is the number tasks undertaken in the neighborhood, and the vertical axis is the marginal cost/benefit to the neighborhood of each task).
b. What is the optimal amount of time to devote to home maintenance in this neighborhood?
c. Who should devote time to home maintenance?
d. What tasks should be done?
e. Suppose that people are assigned tasks as follows: Pete plants flowers in the median, Angela installed the streetlights, Kirk paints the shutters, Ruth replaces siding, Sam repairs the sidewalk, Beverly plants trees, and Gertrude repairs the curbs. Each gets paid the resulting increase in property values. Does this scheme works to bring about efficient resource allocation? Explain.
f. If there were no neighborhood organization to coordinate maintenance activities, could we expect people in the neighborhood to undertake these maintenance tasks on their own? If so, which ones? If not, why not?
2. An important way to reduce water pollution from farms is to plant a buffer zone between crops and the water. Economists estimate that for each bush there is a $20 gain in reduced pollution. Supply and demand schedules for the bushes are given below.
Price Demand Supply
$50 1,000 5,000
$40 2,000 4,000
$30 3,000 3,000
$20 4,000 2,000
$10 5,000 1,000
a. What is the market clearing equilibrium price and quantity?
b. What is the efficient quantity?
c. How would Pigou propose correcting this inefficiency?
d. Draw a diagram illustrating your answer.
3. Anyone who has ever eaten crabs from the Chesapeake Bay knows that the quality of crabcakes declines with the square of the distance from the Bay. Thus, one should never order crabcakes at Red Lobster, for example. Unfortunately, crabs have been over-harvested. Some data relating the daily crab catch to number of crabbers is given below.
Number of crabbers Total crab catch Average crab catch Marginal catch
(bushels)
1 50
2 100
3 150
4 200
5 240
6 270
7 290
8 300
9 300
10 300
- Complete the table above with the average and marginal catch.
- Assume that the price of a bushel is $1 and the opportunity cost of crabbing is $30. How many crabbers will harvest crabs on a given day?
- What is the efficient number of crabbers?
- Suppose the government wished to promote efficiency in crabbing by requiring crabbers to purchase licenses. How much should they charge (per day) for a license?