Homework #2, Econ 611, Prof. Hanson

1. There are 21 students in a class. One of them, John Smith, would benefit $50 if the time of the class were made ten minutes earlier. Of the twenty other students, five would benefit $2 by this change and fifteen would lose $2.

a. Would placing this issue up for a vote lead to an economically efficient outcome?

b. Is there a set of transfers that would, together with changing the class time, lead to a Pareto improvement?

c. Assume we can not distinguish the people who gain $2 from the people who lose $2. In this case can we find a set of transfers that would, together with changing the class time, lead to a Pareto improvement?

d. Which of these answers change if John only benefits by $30 from the time change?

2. A clothing factor is downwind from a copper plant that emits particles into the air. These particles cause $100,000 damage per year to the clothes manufacturer. The copper plant could eliminate this pollution by installing a better air scrubber at a cost of $50,000 per year. Is there a way to fix this inefficiency, other than via government intervention?

3. Assume that the demand for backrubs in DC on any given day is Q = 10 - 2 P, while the supply is given by Q = P+1. What is the consumer surplus, producer surplus, and dead weight loss in this market?

4. If a “sin” tax of $3 per backrub were imposed on the buyers, what would be the consumer surplus, producer surplus, and dead weight loss? What would the tax revenue be?

5. If a law were passed prohibiting the sale of backrubs, but allowing people to give backrubs for free, what would be the consumer surplus, producer surplus, and dead weight loss? How many people would want but not get a free backrub? Assume people have to stand in line to get their “free” backrubs, and all have the same value of time.

6. Again assume that a law prohibits backrub sales, but allows free backrubs. This time assume that a random lottery is used to decide who gets the available backrubs. What would be the consumer surplus, producer surplus, and dead weight loss? Which is more efficient here, standing in line or random lotteries?