ECONOMICS 110/112*
Assignment #4/Assignment #1 – Suggested Solutions
2014/2015
Due Dates and Notes:
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DUE: By Friday January 30, 2:00 PM. Completed assignments should be placed in the slot marked for your section in the white assignment collection box on the 2nd floor of Dunning Hall. Late assignments will not be accepted.

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Use the Cover Page (download from the Assignments page on moodle) when submitting assignments. Place diagrams for particular questions with your answers to those questions (not all at the end).

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Group Work: Maximum four per group, all students must be registered in the same class. Names (as they appear on moodle) must be in alphabetical order on the cover page (last names first).

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Graded work will be available for pick-up beginning on the afternoon of Friday February 13 in the Econ
Distribution Center, Dunning Hall Room 334. You will require your student card.

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This assignment covers material from Chapters 16-19 of the text for the 110 assignment and Chapters 1, 2,
33 (pp 802-13), 3, and 19 for the 112 assignment.

True, False, or Uncertain

[48 marks - 6 marks each]

Explain why each of the following statements is True, False, or Uncertain according to economic principles.
Use diagrams where appropriate. Unsupported answers will receive no marks. It is the explanation that is important. 110 assignment – first five questions (first five for 112 follow)
A4-1. The Ontario government now provides (pays for) influenza vaccinations free to all residents who want them.
This policy will result in less deadweight loss in the flu shot market than private purchases of “flu” shots.
[Hints: Assume that the flu is highly contagious and that the vaccination supply curve is perfectly elastic.]
Uncertain.
Under private decision-making an individual would choose to get a flu shot whenever the net private benefit
(MPB) of doing so (expected reduction in “flu costs” less the time and trouble of getting a shot) is greater than or equal to the price of getting the flu shot (MSC). As shown below, this would result in Vp flu shots.
However, because the flu is contagious, then getting a flu shot also generates benefits for others since they have a lower probability of getting the flu. So the marginal social benefit (MSB) of a shot is greater than the MPB. The efficient level of flu shots occurs where MSB = MSC, shown in the diagram as V* or V** depending whether MSB is given by MSB’ or MSB”. Therefore, under private decision-making, flu shots are “underprovided” relative to the social optimum (V** > V* > Vp) generating a DWL in the “flu shot market” equal to area xy’z’ or area xy”z”.
Under the free shot policy, the dollar cost to the individual falls to zero and the quantity would rise to Vf. If
MSB is given by MSB”, V** > Vf > Vp, so we are closer to the efficient outcome and the DWL is reduced to area vwz”. However, if MSB is given by MSB’, Vf > V* > Vp, so flu shots are “overprovided”, and there is
DWL equal to area uvz’. Although the diagram shows uvz’ < xy’z’, it need not be so, it may be larger.
Whether any reduction in DWL in the “flu shot market” is enough to compensate for the DWL the government would cause in other markets raising tax revenue to pay for the shots is an open question, but the basic tradeoff is clear.

$

y” y’ MPB

p

w z’ z” v x u Vp

MSC
MSB”

MSB’
V
V* Vf V**

A4-2. Pollution emissions are a “bad”. Therefore the efficient level of emissions is zero.
False/Uncertain.
Pollution emissions are considered a “bad” because they generate a cost borne by an external party. This is captured by the MEC of the emissions. MEC must be added to the marginal private cost of emissions in order to obtain the full marginal social cost of emissions. In the diagram below, MPC represents the marginal private costs of emissions and MPB = MSB represents the marginal private and social benefit of emissions. If MEC is such that marginal social costs are given by MSC, then the optimal level of emissions is