Quiz 3 (due in class Oct 10th)

EC208 - Intro to Microeconomics: Quiz 3 - Market and Government Failure

Professor Matthew Festa

Due in Class Oct 10th, 2006

1) Explain the two differences between a private and public good. Provide one example of a public good that the market will under provide (1 point).

2) Draw a supply and demand curve for fishing. Fishing requires the use of motor boats. Neither the fisher nor the consumer of the fish he catches care about the pollution this causes to the water. This pollution, in turn, damages the property values of homes. What type of externality is this? Should the optimal output and price be higher or lower? Show what shift in any curve should occur to bring about this possibility. Finally, provide two ways the government can bring about this optimal output and price . (3 points).

3) Draw a supply and demand durve for English teachers. Most parents recognize the value of learning to read and write but do not much care if their kids learn anything about great books. However, great books are known to open people's minds up to new and interesting ideas that improve their understand and critical thinking. What type of externality is this? Should the optimal output and price be higher or lower? Show what shift in any curve should occur to bring about this possibility. Finally, provide two ways the government can bring about this optimal output and price . (3 points).

4) Explain the difference between moral hazard and adverse selection with one example for each. Use your notes and/or textbook if you have problems coming up with examples. (2 points).

5) Explain the concept of rational ignorance (1 point).