a). What is the optimal level of pollution reduction?
b). Show that this level of pollution reduction could be accomplished through taxation. What tax per unit would generate the optimal amount of pollution reduction?
Question 2
a). Peterson, Hoffer, and Millner (1995) showed that air bag use has led to increases in car crashes. Despite this finding, the government mandates that new cars have airbags, rather than taxing their use. Is this policy a contradiction?
b). Caffeine is a highly addictive drug found in coffee, tea, and some sodas. Unlike cigarettes, however, there have been very few calls to tax it, to regulate its consumption, or limit its use in public places. Why the difference? Can you think of any economic arguments for regulating (or taxing) it’s uses?
c). When Wisconsin had lower drinking ages than its neighboring states, it experienced higher levels of alcohol-related crashes in its border counties than in other counties in its interior. What does this finding imply for the spillover effects of the policies of one state (or country) on other jurisdictions?
Question 3 Consider the following activities: (i) smoking by individuals; (ii) toxic waste production by firms; (iii) research and development by a high-tech firm; and (iv) individual vaccination against communicable illness. Answer the following two questions for each of these activities:
a). Is there an externalize? If so, describe it, including references to whether it is positive or negative, and whether it is a consumption or production externalize.
b). If there is an externalize, does it seem likely that private markets will arise that allow this externalize to be internalized? Why or why not?
2 Question 4
A new public works project requires 300,000 hours of labor to complete. a). Suppose the labor market is perfectly competitive and the market wage is $20. What is the opportunity cost of the labor employed for the project?
b). Suppose that there are currently unemployment among workers and that there are some workers who would willingly work for $12 per hour. What is the opportunity cost of the employed? Does this vary depending on the fraction of would-be unemployed workers hired for the project?
c). If your answers to (a) and (b) differ, explain why. Question 5 a). The National Institute on Drug Abuse describes six-year trends in teenage smoking, drinking, and other drug use on the Web at http://www.nida.nih.govnnfofax/hsyouthtrends.html. According to this site, for which age groups have the changes in the rates of teenage smoking and drinking been most pronounced? b). Think of an example of a free rider problem in your hometown. Can you think of a way for your local government to overcome this problem?
