a) The construction of a beach-front resort has led to erosion of the seabed, destruction of corals and reducing the catch of fishermen operating in the vicinity. Draw a diagram to analyse the efficiency issue in this incident. If the fishermen and the resort owner can negotiate costlessly and the fishermen has the legal right to the sea that is free from any damages, how would this problem be resolved? (b) Consider a product market with three consumers A, B and C with demand function PA = 6 – QA, PB = 6 – 2QB and PC = 12 – QC respectively, where P is the price in dollars and QA, QB and QC are the quantities demanded by Consumer A, B and C respectively. The marginal cost of the product is constant at $4. (i) If the product is public good, analyse the product and determine the optimal quantity of the product in the market. (ii) How will your answer be different if the product is a private good instead?
(a) The construction of a beach-front resort has led to erosion of the seabed,
destruction of corals and reducing the catch of fishermen operating in the vicinity.
Draw a diagram to analyse the efficiency issue in this incident. If the fishermen
and the resort owner can negotiate costlessly and the fishermen has the legal right
to the sea that is free from any damages, how would this problem be resolved?
(b) Consider a product market with three consumers A, B and C with demand
function PA = 6 – QA, PB = 6 – 2QB and PC = 12 – QC respectively, where P is the
price in dollars and QA, QB and QC are the quantities demanded by Consumer A,
B and C respectively. The marginal cost of the product is constant at $4.
(i) If the product is public good, analyse the product and determine the
optimal quantity of the product in the market.
(ii) How will your answer be different if the product is a private good instead?
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