This section of the course deals with market efficiency, utility, market failure

Question

This section of the course deals with market efficiency, utility, market failure and elasticity.

A. Market efficiency - in an effort to combat homelessness, some cities propose mandating a price ceiling on rents - that is to force landlords to limit the price they will charge. In many cities like New York, some older apartments have rent control laws. Economists would argue that price ceilings distort the market. Explain in your own words why the policy of rent control might have an adverse impact on citizens. And in your opinion, what alternatives might local governments have (instead of using price mechanism) to reduce homelessness. (10 points)

B. Provide an example of positive externality and negative externality that is relevant to you. ( 5 points each = 10)

My examples:

In December 2017, there was a fire at Atlanta airport that led to the airport being shut down. I was due to fly back to IAH via Atlanta from Munich, Germany. I experienced a negative externality in having my flight to IAH via ATL cancelled because of the fire. I did end up returning on the same day as I routed through British Airlines to Heathrow (possibly the world's worst place to transit through). When I arrived at the terminal in Heathrow, I had to get a connecting bus to the next terminal for my United flight to Houston. It turned out the tunnel was shut down because of an accident, and no buses were running between the terminals. This was another negative externality. In the end, I made my connection flight by bare minutes, only because I left the terminal, officially entered the country, took the train to the other terminal and walked about 2 miles between terminals and levels to get to the plane. I was not the cause of the fire in Atlanta or the cause of the accident at Heathrow, but I experienced the negative externalities of loss of time and an increase in stress from the incidents.

Positive externality - over the past 3 years, I've trapped and paid for about 18 stray and feral cats in my neighbourhood to be neutered and spayed. Where possible, I have found homes for them or released them. By neutering them, they won't continue to breed and add to the population. My neighbours always call me to tell me about new strays or kittens, but they have never offered to pay or share any of the cost. So they experience the positive externality of not having the neighbourhood run over by stray cats since I do the work in trapping, vaccinating and neutering the cats. This is an example of how other people benefit from an action that they don't have any part in.

C. Provide an example of diminishing marginal utility that you have experienced. (5)

D. Elasticity of demand is helpful in understanding the effects of punishment on suppliers.  The War on Drugs has not reduced the supply or the demand for illegal substances. Answer the following question

D1. For someone addicted to substances like illegal drugs, what is the price elasticity of demand - I'm not looking for a number, I want the concept. In other words, explain to me using the concept of elasticity what this means. (5)

D2. Using price elasticity of demand analysis, explain whether the government should target supply and suppliers through punitive measures such as enforcement, jail time and fines or target the demand side and consumers? Explain your reasons. (10)

Explanation / Answer

C.Diminishing Marginal utility-I am very fond of ice cream and I can eat ice cream every after having a heavy meal.But I can't eat endless amount of ice cream.I feel that after consuming 2 units, I no longer feel the urge to eat,and thus,I stoop eating.I believe this is DMU because after 2 successive consumption my marginal utility from each additional unit of ice cream falls.

D1.The value of elasticity is <1 or the demand is very inelastic because drugs becomes a necessity for the addicts and they are very to pay any amount for it.

D2.I believe government should target the suppliers and the supply.More people are becoming drug addicts every year and this number is rising substantially.If there were no drugs available in the market,there would be no means of consumption.

If the government targets the demander a and they are charged with punishment,then the suppliers would find other prospective clients and this problem won't be solved.

Thus, government should target suppliers.

A and B are already answered in the question and the answers are correct.Please let me know if I can assist further.

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