Answer Public Economic Questions

1. Draw a Supply and Demand graph for a competitive market in refined aluminum. Draw what happens when there is a negative externality from pollution, i.e. a situation where Marginal Social Cost is higher than Marginal Private Cost. Show how a tax on aluminum refineries could lead to a more efficient outcome. Explain your answer in 2-3 sentences.

2. Draw a Supply and Demand graph for the refined aluminum market again, with a negative externality, but this time assume that the market is monopolistic. Show how a tax on producers could lead to a less efficient outcome. Explain your answer in 2-3 sentences.

3. Explain the difference between rational ignorance and rational irrationality. Which do you think is a better explanation for the prevalence of regulatory capture? Which do you think is a better explanation for the under-provision of some public goods? Which do you think is a better explanation of the over-provision of some public goods? Explain your answer to each question in 1-2 sentences.

4. Suppose there are three county commissioners considering how to allocate a federal grant to improve infrastructure. They are considering the following proposals: 1. Roundabout near the outlet mall to relieve traffic congestion; 2. Repair a bridge over the river in a rural part of the county; 3. Add a bus line from town to the outlet mall so that the employees have public transit to work available.

Commissioner A has the following preferences:

1. Roundabout

2. Bus

3. Bridge

Commissioner B has the following preferences:

1. Bus

2. Bridge

3. Roundabout

Commissioner C has the following preferences:

1. Bridge

2. Roundabout

3. Bus

Explain what happens if they consider these proposals against each other, including how each possible vote would go. What determines the “winning” proposal? Is there a method of voting that could avoid the problem of cycling?