The concept of supply and demand

  1. Give an example of an externality cost and an externality that benefits people. Specifically, explain why externalities tend to cause additional pollution and environmental degradation and why externalities make environmental legislation necessary.
  2. Use the concept of supply and demand to explain why an increase in Medicare subsidies can lead to an increase in health care spending by the government.
  3. A government is thinking about increasing the sales tax rate. Should it use static or dynamic tax analysis? Explain why one approach is better than the other. Give one example of a tax rate plan that would be static and another than would be dynamic.
  4. In the illegal drug market, dealers can sometimes dramatically decrease the purity of the product without seeing much of a decrease in sales. On the other hand, in restaurants, a small decrease in food quality can often mean death the to business. Explain why this is true in the context of elasticity.

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