Question

Explain why each of the following statements is True, False, or Uncertain according to economic principles. Use diagrams where appropriate. Unsupported answers will receive no marks. It is the explanation that is important.

A4-1. Suppose your roommate enjoys loud music and values this activity at $50/day. If you value peace and quiet at $30/day, the efficient solution is for your roommate to listen to the efficient solution is for your roommate to listen to the music.

A4-2. Private markets will provide the efficient amount of a pure public good. [Hints: Assume constant marginal cost of production and an economy with two consumers.]

A4-3. A properly constructed tax on greenhouse gas emissions results in an efficient amount of emissions abatement and an efficient allocation of abatement across emission sources.

A4-4. Suppose Adam and Brook will make $50,000/year for the next two years from their jobs as golf pros. Adam spends all of his after-tax money every year while Brook saves $10,000 in year 1 and earns $500 in interest income in year 2. If the income tax system taxes both labour and interest income at a rate of 25%, the income tax is both proportional and horizontally equitable.

Answer 1