Pracitce questions tutorial 5

Question 1

Read the article: “London New Year’s Eve fireworks made ticket-only for first time”, a news article in The Guardian (download from Canvas).
Which market failure(s) do you think the government was trying to correct with this ticketing, and how?

Answer 1

Common resource because fireworks are non-excludable, but space is rivalrous, so it is overconsumed (hence crowded); Public good because fireworks are non-excludable and non-rivalrous, so it is underproduced. Govt steps in to provide this good and use ticketing as a way to fund this provision.

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Question 2

The mayor of Richmond is considering proposals to deal with an unsafe intersection. She could install a traffic light at a cost of $50,000 or she could install stop signs at a cost of $5,000. The traffic light is expected to reduce the risk of fatality by 0.45 percent and the stop signs are expected to reduce the risk of fatality by 0.054 percent. If the value of human life is estimated to be $10 million, what choice should the mayor make? Explain.

Answer 2

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Question 3

Why does the government need to perform a cost-benefit analysis before providing a public good? What are some major difficulties of cost–benefit analysis?

Answer 3

It reveals whether it is efficient for the government to provide a public good. It involves comparing the total benefits of all those who would use the public good with the costs of providing and maintaining it.

Difficulties: • People may not represent their preferences properly; • Difficult to value certain intangible things such as ‘increased happiness’.

Question 4

To help unskilled workers, the Australian government introduces a national minimum wage above the equilibrium level for some lower-paid industries.
(a) Analyse this event diagrammatically and assess its economic impact on the relevant market(s).

Answer 4

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Question 5

(b) What are common arguments offered for and against the minimum wage?

Answer 5

For: • minimum wage makes the poor better off by providing a minimally acceptable standard of living. Against: • causes unemployment; • encourages teenagers to drop out of school; and • prevents some unskilled workers from getting on-the-job training.

Question 6

Australia has a higher tax on luxury cars compared to other cars. Is this an effective way to raise revenue for the government from the rich?

Answer 6

The price elasticity of demand for luxury goods is high relative to the price elasticity of supply. Hence, when a tax is imposed on luxury cars, there will be a significant reduction in the quantity demanded and only a slight increase in the equilibrium market price. The burden of the tax falls mostly on the suppliers. The rich buyers end up bearing little of the tax burden.

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