Explain the externality generated when a shepherd grazes sheep in a field that is common property that several other shepherds use
What will be an ideal response?
The shepherd allows his sheep to graze in the field until the marginal benefit of grazing there equals the marginal cost to the shepherd. However, by grazing his sheep in the field, the shepherd increases the cost of grazing to all the other shepherds. This occurs because less grass is available for all other sheep. Each shepherd's grazing decision affects the costs to all the others, but the shepherds do not consider the effects on others when making their own decisions.
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Refer to Table 4-5. An agricultural price floor is a price that the government guarantees farmers will receive for a particular crop. Suppose the federal government sets a price floor for wheat at $21 per bushel
a. What is the amount of shortage or surplus in the wheat market as result of the price floor? b. If the government agrees to purchase any surplus output at $21, how much will it cost the government? c. If the government buys all of the farmers' output at the floor price, how many bushels of wheat will it have to purchase and how much will it cost the government? d. Suppose the government buys up all of the farmers' output at the floor price and then sells the output to consumers at whatever price it can get. Under this scheme, what is the price at which the government will be able to sell off all of the output it had purchased from farmers? What is the revenue received from the government's sale? e. In this problem we have considered two government schemes: (1 ) a price floor is established and the government purchases any excess output and (2 ) the government buys all the farmers' output at the floor price and resells at whatever price it can get. Which scheme will taxpayers prefer? f. Consider again the two schemes. Which scheme will the farmers prefer? g. Consider again the two schemes. Which scheme will wheat buyers prefer?
Sarah's demand for routine medical visits is q = 10 - 0.2p when she is healthy and q = 20 - 0.2p when she is sick. Medical visits cost $50 each if Sarah has no medical insurance. She is sick 20% of the time. Sarah is considering two different insurance plans. One offers free medical visits; the other plan costs less up front but requires that Sarah pay $5 per medical visit. Compare the two plans
in terms of the trade-off between risk and moral hazard. What will be an ideal response?