Problem set #4
Due on Tuesday, November 8th, in class.
The first part of this problem set is a group project. Your group – comprising four students in your section – is charged with answering the following question: ‘How should Vermont raise the money it will need to rebuild the public infrastructure that was destroyed in Tropical Storm Irene?”
Here are some aspects of this to keep in mind:
- Your group must agree on the answers. Take the time to persuade one another that you have come up with the best possible answers
- You must list the three other alternatives that you considered and explain why you rejected them.
- Your answers should be based on the theory and other material we have studied in the class
- Your answers should also be based on online research about Irene and Vermont’s economy
- Your answer – hand in one answer per group – should be no less than three pages and no more than eight pages (double spaced).
- You are encouraged to talk to me – during office hours or another time – about what you are coming up with.
1. Suppose the weekly demand curve for wristwatches in Lincoln, Nebraska is given by the equation P = 12 – 0.25Q, and the weekly supply of wristwatches is given by the equation P = 6 + 0.75Q, where P is the dollar price of a wristwatch. Sketch these demand and supply curves and then calculate:
a. Consumer surplus
b. Producer surplus
2. Under what conditions will the deadweight loss from an import tariff be relatively small? Under what conditions will they be relatively large? Justify your answer using a graphical model.
3. When President Bush backed an import quota on foreign steel, Steven Landsburg, an economist at the University of Rochester, wrote the following in the New York Times:
Free trade is not only about the right of American consumers to buy at the cheapest possible price; it’s also about the right of foreign producers to earn a living. Steelworkers in West Virginia struggle hard to make ends meet. So do steelworkers in South Korea. To protect one at the expense of the other, solely because of where they happened to be born, is a moral outrage.
How does an import quota allow the US government to protect steelworkers in West Virginia at the expense of steelworkers in South Korea? Is Landsburg making a positive or a normative statement?
A few days later, Tom Redburn published an article disagreeing with Landsburg:
It is not some evil character flaw to care more about the welfare of people nearby than about that of those far away — it’s human nature. And it is morally — and economically — defensible. … A society that ignores the consequences of economic disruption on those among its citizens who come out at the short end of the stick is not only heartless, it also undermines its own cohesion and adaptability. Indeed, the more efficiently the machinery of the market has operated in recent years, the more those who see themselves as its victims have tried to throw sand in the gears.
Which of these two arguments do you find more convincing, and why?
4. You are an economic consultant to a member of Congress. Someone has just introduced a bill that will impose a $50 carbon tax, which will of course affect the market for home heating oil. Would you expect the entire tax to be paid by consumers? If your job were to determine who bears the burden of the tax, what information would you collect? Justify your answer.
5. The fumes from dry cleaning can contribute to air pollution. Suppose the diagram inserted below illustrates the situation in the dry cleaning market.
a. Explain how a government can use a tax on dry cleaning to bring about the efficient level of production? What should the value of the tax be?
b. How large is the deadweight loss (in dollars) from imposing the tax? If there is a deadweight loss, why is it still desirable to impose the tax?