Question 12: Demand elasticity and social loss. Consider two vaccines for different viruses χ and . Assume that the marginal cost of producing both drugs is constant and that the fixed cost is small. In other words, assume that the supply curve for both drugs is flat.
a Suppose that demand for vaccine χ is price elastic, whereas demand for vaccine is relatively inelastic. Plot the private demand curve for both drugs on separate axes.
b For the sake of example, assume that both viruses have the same externality. Plot the social demand curve for both drugs and label the social loss in each case.
c Explain intuitively why, all else equal, social loss is greater in the case of elastic demand than it is in the case of inelastic demand.
Question 13- Secondhand smoke I. Assume that the daily demand for packs of cigarettes in the tobacco-addicted nation of Pcoria is
Q=100−P
Further assume that the marginal cost of producing a pack of cigarettes is §6, and that the market for cigarettes is perfectly competitive.
Assume that each pack of cigarettes smoked does §6 worth ofhealth damage to the smoker in the form ofincreased cancer risk and a total of§5 worth ofhealth damage to the smoker’s neighbors via secondhand smoke. Finally, assume that all Pcorian cigarette consumers are aware ofthese costs.
a Assume that a Pcorian smoker named Jay states that he is willing to buy a pack of cigarettes for §8, but not a penny more. In this market, where the price is §6 per pack, what are the private benefits and private costs incurred whenever he buys a pack of cigarettes? Is it privately efficient for him to buy a pack of cigarettes at this price?
b. What about the public benefits and public costs? Is it socially efficient for him to buy a pack of cigarettes at this price?
c. Suppose that, due to the introduction of a hyper-effective tobacco fertilizer, the cost of producing a pack of cigarettes plummets to §1. Now is it socially efficient for Jay to purchase a pack of cigarettes?
Question 14 – Secondhand smoke II. Review the assumptions from the previous problem, and assume that it still costs §6 to produce a pack of cigarettes.
a. Draw the private supply curve and the private demand curve in this market. What is the privately efficient quantity of packs purchased per day?
b. Draw the public supply curve in this market. Explain why it differs from the private supply curve, and how this represents the externality from secondhand smoke. Highlight the area(s) of your diagram that represents social loss, and interpret this loss in terms of cigarette smoking.
c. What is the socially efficient quantity of packs purchased per day?
d. Suppose that, due to the introduction of a hyper-effective tobacco fertilizer, the cost of producing a pack of cigarettes plummets to §1. How does this affect the level of smoking and the level of social loss? Explain.
e. Suppose the government decides to pursue a Pigouvian solution to eliminate social loss. What sort of tax or subsidy would they implement, and what is the resulting quantity of cigarette packs purchased?
f. The opposition party in the Pcorian parliament loudly opposes the proposed tax plan as government meddling. The opposition leader invokes the Coase theorem and says that the socially efficient level ofsmoking will occur even in the absence of government intervention. How are property rights assigned in this instance? Why might the Coase theorem not apply in this setting?
g. Assume that the Coase theorem actually does apply in this setting. The Pcorian parliament passes a new law giving anyone the right to forbid his neighbor from smoking. Who benefits, and who is harmed, by this new law? How will this affect the level of smoking?
Essay questions Question 16– Below is the abstract ofa recent NBER working paper entitled “Organ allocation policy and the decision to donate” by Judd Kessler and Alvin Roth (NBER Working Paper No. 17324, 2011):
Organ donations from deceased donors provide the majority of transplanted organs in the United States, and one deceased donor can save numerous lives by providing multiple organs. Nevertheless, most Americans are not registered organ donors despite the relative ease of becoming one. We study in the laboratory an experimental game modeled on the decision to register as an organ donor, and investigate how changes in the management of organ waiting lists might impact donations. We find that an organ allocation policy giving priority on waiting lists to those who previously registered as donors has a significant positive impact on registration.
a. The choice whether to register as an organ donor is a decision based on comparing costs and benefits. Suppose that registered organ donors receive priority on organ waiting lists. What are the costs of registering? What are the benefits, How do the benefits of registering vary depending on the potential registrant’s health, his age, his blood type, and the organ he is most likely to need? What other factors might affect the potential benefit of registering as an organ donor?
b. The health of the organ donor can significantly impact the value of the donated organ. Diabetic donors, for instance, produce lower-quality organs than non-diabetic donors. What effect would the Kessler–Roth scheme have on the aver-age quality of donated organs? How would this affect the potential benefits of registering as an organ donor?
c. Suppose the Kessler–Roth scheme is implemented and effective in increasing the number of organs harvested for transplantation. How does the scheme affect the welfare of patients awaiting organ transplants who are not registered organ donors? [Hint: There are two competing effects.]
