1.Show that when external benefits are involved, market outputs and prices tend to be too low relative to the socially efficient levels. Use a suitable fully-labelled graph to explain your answer. How would your answer change if external costs were involved instead of external benefits?
2.What impact would a rise in the interest rate have on the intertemporally efficient rate of today’s output? Use a suitable fully-labelled graph to illustrate your answer.
3.Explain what you understand by the following:
a.Market failure- give an example
b.Command-and-control policies – give an example
c.Incentive-based policies- give an example
4.Manitoba is considering preserving a very scenic river. The community has 100 people each of whom has a demand given by where q is the number of miles preserved and p is the price per mile she/he is willing to pay for q miles of preserved river. The marginal cost of preserving the river is $500 per mile.
a.Draw a full-labelled diagram to depict the problem described above.
b.How many miles would be preserved in an efficient allocation? Explain your reasoning.