Download Micro-Unit-6-Study Guide - ms

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Microeconomics
Unit VI: Market Failures
Chapter 28: Government and Market Failure
Chapter 29: Public Choice Theory and the Economics of Taxation
Chapter 32: Income Inequality and Poverty
1. Public Goods E, G, B, U, N
a. Identify and explain the two characteristics of public goods how does it create a free-rider
problem? Give and explain examples.
b. Explain the optimal production amount of a public good.
c. Using the marginal cost=marginal benefit rule, describe cost-benefit analysis.
2. Externalities E, G, B, U, N
a. Assume excessively large SUVs include spillover costs that are not borne by the initial
consumer but rather society as a whole.
i. Explain two negative externalities associated with SUVs. Who pays the external costs?
ii. Use a supply and demand graph to illustrate a negative externality. Identify the current
price and output and the socially optimal price and output.
iii. Use MSB and MSC to explain if SUVs are being overallocated or underallocated by the
free market. Explain why the free market failed.
iv. Explain what the government must do to fix this negative externality
E, G, B, U, N
b. Assume the creation of city parks has spillover benefits that improve society as a whole.
i. Explain two positive externalities associated with making more parks. Who receives the
external benefits?
ii. Use a supply and demand graph to illustrate a positive externality. Identify the current
price and output and the socially optimal price and output.
iii. Use MSB and MSC to explain if parks are being overallocated or underallocated by the
free market. Explain why the free market failed.
iv. Explain what the government must do to fix the positive externality.
3. Government Intervention E, G, B, U, N
a. Explain if the government should tax or subsidize a monopoly to get them to produce the
socially optimal quantity. Make sure your answer clearly explains why.
b. Describe why “the tragedy of the commons” is needed to assess a market-based approach to
negative externalities.
4. Tax Incidence and Efficiency Loss E, G, B, U, N
a. Graph and explain the impact of an excise tax when demand is highly inelastic.
b. Explain what effect the elasticity of supply has on the impact of an excise tax.
c. Describe how the burden of the tax is distributed among producers and consumers.
d. Complete FRQ: Tax Incidence See Back. Must use complete sentences.
5. Income Inequality and Poverty E, G, B, U, N
a. Draw and explain the Lorenz Curve. Explain what a decline in the Gini ratio indicates.
b. Out of the seven reasons given for causes of Income Inequality, which one do you believe is
the most prominent? Why?