ECONOMICS State and Local Finance


State and Local Finance

Homework #1 (20 points)

Start each new question on a separate page.

1. Use the diagram below to answer the following questions. (5 points)

a. Calculate the consumer surplus at the market determined price. (Show your work.)
b. Calculate the producer surplus at the market determined price. (Show your work.)
c. Calculate the net benefit to society when the market is in equilibrium. (Show your work.)
d. Suppose a government regulation has limited output to 675 units. Calculate the deadweight loss to society caused by that regulation. (Show your work.)
e. Would this deadweight loss be the result of a market failure?

2. Explain what market failure is. Identify and explain the three sources of market failure Fisher discusses. (7 points)

3. It is argued that the production of healthcare generates externalities. Provide and explain two examples of externalities that might be the result of producing healthcare. If this argument is true, would a private market underproduce or overproduce healthcare. Explain your answer and support it with a diagram. (4 points)

4. Explain what Lindahl pricing is. Explain how Lindahl pricing is used to determine the demand for a public good. Provide an example illustrated with a diagram. Use your diagram to explain and show how the Samuelson Rule would be used to determine the optimal amount of the public good to provide. (4 points)

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