Assignment 3

1. Suppose there are two individuals with identical demand curves characterized by the equation Q = (33/2) – (P/2).

a) What is market demand if these demand curves are added horizontally?

b) Vertically?

2. Give an example of a public good and briefly explain how it fits the characteristics of a public good.

3. Outdoor concerts would aesthetically enhance the lives of people who visit the local park.
Suppose there are 200 community members who each receive a marginal benefit of monetary value, “P” such that P=9-3q, where q is the number of outdoor concerts. After 3 concerts they are satiated and P=0. Suppose there are another 3 community members who enjoy these gatherings more and receive a marginal benefit of P=300-50q. After 6 concerts they are satiated and P=0. So, there are a total of 203 demand curves. Each concert costs $1200 to produce.

1. Assuming outdoor concerts are local public goods, what is the efficient number of outdoor concerts for this community? Show your answer algebraically and graphically.
2. In what ways is an outdoor concert a public good?
3. Do you think that the private markets will provide enough concerts? Why or why not?

4. a) Briefly summarize the Coase Theorem (include the 3 key conditions).

b) Give an example in which the Coase Theorem would suggest government intervention is not necessary and explain why.

c) Give an example in which the Coase Theorem would suggest government intervention may be desirable and explain why.

5. List the major types of approaches government typically takes to deal with negative externalities.