Each citizen in a small town suffers 5 units of irritation for each bushel of leaves burned in the town. The charge for hauling a bushel of leaves to the land fill is a fee equal to 20 units of irritation. There are 25 people in the town, each of whom minimizes personal irritation and has 10 bushels of leaves. In this problem we change several of the assumptions used so far. Individuals now vary in their distaste for carrying leaves to the land-fill. Also, the first 100 bushels burned do not create a problem for anyone because the air could dissipate the smoke without harm. However, after the first 100 bushels the problem sets in as described earlier. How could efficiency be reached under these new circumstances?
What will be an ideal response?
The best way would be for the government to auction off the rights to 100 bushels of burning. Everyone will bid up to 20 units since that would be cheaper than hauling, but after that only those with a special love for burning will bid more. Maximum benefit is received in this way. If everyone simply got rights to burn 4 bushels, those who value burning most could not get more than those who could care less or even prefer hauling leaves. Auctions are a form of negotiation.
You might also like to view...
Allocative efficiency is achieved when
A) firms produce the goods and services that consumers value most. B) firms produce goods and services at the lowest cost. C) there are no shortages or surpluses in the market. D) goods and services are fairly distributed among consumers in an economy.
Rank the components of aggregate demand by their sensitivity to changes in the real interest rate. Start with the most sensitive to the least sensitive.
What will be an ideal response?
Suppose that the government signs a international treaty that cuts the amount of carbon emitted into the atmosphere by 50%. In the market for pollution permits, the:
A. supply of permits will increase. B. supply of permits will decrease. C. demand for permits will increase. D. demand for permits will decrease.
The principle of comparative advantage was first explained by David Ricardo in the early 1800s.
Answer the following statement true (T) or false (F)