ECON 4821: Public Economics - The Presence of Uncertainty and Quantity Approach - Economics Assignment Help

Assignment Task:

Problem I. True or False (20 points, Each 5 points)

Please provide a brief, precise argument for each case. The argument can be in math, words, or graphs as long as it is reasonable. 

1. Without the presence of uncertainty, Quantity approach is as good as price approach to solve the externality problem as long as quotas are tradable. 

2. A painting by Monet is excludable but not rival. 

3. Although education is a large element of federal spending, American students are not placed among the top countries in terms of grades in international tests. 

4. Free rider would not be a problem if people had linear utility functions. 

Problem II. Short Answers (20 points, Each 5 points)

Your answers can be in math, words, or graphs as long as it is reasonable. 

1. Houston is one of the most flooded cities in the US. Suppose, as a solution, City wants to build a new dam which costs $50 per household. However, a voluntary campaign run by the City’s representatives is unable to collect the sufficient fund despite the fact that each family is willing to pay up to $100 for building a dam to insure themselves from the flood. What is the problem? Why does it happen? And what is your proposed solution to finance the dam? 

2. R&D investments in the US are subsidized by the federal and local governments. Why? What problem would happen without R&D subsidies? 

3. Why might the government be less efficient in production/provision than the private sec tor? 

4. How does warm glow solve the free rider problem? 

Problem III. Noisy Neighbor (30 points)

Paul and David are two neighbors in an isle where nobody else lives. Paul loves music and listens to loud music without using earphones each night. Paul gets utility from music, m, as well as his general consumption, cP . Specifically, his utility is uP = ln(cP ) + αP ln(m) where αP > 0. Nonetheless, David is a researcher annoyed by Paul’s music at nights. David’s utility is uD = ln(cD) − αD ln(m) where 0 < αD ≤ αP . Let p denote the price of consumption good and q denote the price of music subscriptions. Each of them has income I. 

1. Setup Paul’s problem. Be clear about his choice variable(s), his objective function, and the constraint he faces. Then solve the problem i.e. introduce his private optimal consumption bundle. (5 pts) 

2. Setup David’s problem. Be clear about his choice variable(s), his objective function, and the constraint he faces. Then solve the problem i.e. introduce his private optimal consumption bundle. (5 pts) 

3. Now, setup the social planner’s problem where the planner cares equally about the con sumers. Be clear about the planner’s choice variables, objective function, and the con straint the planner faces. Then solve the planner’s problem i.e. introduce the social optimal bundle. What happens when αP = αD? (7 pts) 

4. Compare the private optimum and the social optimum. How do they differ? Why do they differ? What type of problem exists there? (3 pts) 

5. Now, provide a Coasian solution that matches the private optimum to the social optimum. First, clearly explain your proposal in words. Then, explain intuitively, i.e. in words, why would your proposed solution match the two optimums. (5 pts) 

6. Discuss the challenges of implementing your proposed Coasian solution. We discussed sev eral challenges of implementing the Coasian solution. Briefly discuss which of them exist and which don’t. (5 pts) 

Problem IV. Firefighters (30 points)

John and Maria are the only two residents of Econvil lage. Both get utility on their private consumption good, c, and the total number of firefighters hired for Econvillage, F = fJ + fM. Specifically, John’s utility is uJ = 4 ln(cJ ) + ln(F) and Maria’s utility is uM = 4 ln(cM) + ln(F). So their utilities are identical. Each of them has an income of $90. Price of the consumption good and price/wage of each firefighter are both equal to $1. 

1. How many firefighters are hired if the government does not intervene? How many are paid for by John? By Maria? Be clear about the problem setup for both persons including the choice variables, objective function, and the constraints. (7 pts) 

2. What is the socially optimal number of firefighters? Be clear about the social planner’s problem setup including the planner’s choices, objective function, and the constraint. (7 pts) 

3. Compare the social optimum and the private optimum. How and why do they differ? What type of problem exists there? (4 pts) 

4. How would the situation change if John and Maria were a family together i.e. they had perfect altruism towards each other? Just explain the intuition. Math is not required here. (5 pts) 

5. Now, back to the case with no altruism, suppose that the state government hires 9 fire fighters for Econvillage at no cost from the village. Now, resolve the private optimum. How does it differ from 1? What is the total number of firefighters, both privately and publicly financed, in Econvillage? What is the name of this phenomenon? (7 pts)

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