1. The distributional consequences of the delineation of roperty rights are elim

Question

1. The distributional consequences of the delineation of roperty rights are eliminated when preferences are quasi- inear (or in the absence of income effects). True or false? In a market for a dirty good, the inverse demand function is given by p = 100-y, and the private marginal cost of production is given by MC = 10 + y. The pollution enerated by this industry creates éxternal damages given y the constant marginal external cost of 2 dollars. (1) Find the competitive equilibrium without regulation (Hint: p = MC) (2) Find the socially optimal output(Hint: p= MC + 2) (3) Determine the Pigovian tax that would result in a competitive market producing the socially efficient output.

Explanation / Answer

1. True

Because quasilinear preferences has characteristic that one good is consumed in fixed quantity irrespective of income.

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