Question

2 Short answers

Please provide 2-3 sentences answering each question

2.1 What are the two most straightforward ways to regulate exter-nalities? What is one challenge with these ways of regulation?

2.2 Assume two identical firms with MC = 5 are competing following a Bertrand Oligopoly model. Inverse market demand is p = 650−10Q. What is the Nash-Bertrand Equilibrium?

2.3 What is a real-life example of the Coase Theorem working effectively?

2.4 What are the two major types of opportunistic behavior? Define each of them.

Thank you!

Answer 1

1. Pigouvian Tax: It is charging the exact amount of marginal external cost in order to regulate externalities.CHALLENGE: Finding the exact amount of externality.
Merger: Merge the firm which is causing externality with the one which is affected by it. Merging the firms helps in regulating the externalities. CHALLENGE: It might not be possible to merge due to various reasons.

2. Nash Bertrand equilibrium would be both the firms charging a price equal to MC i.e. 5. In the Bertrand model, charging marginal cost is the equilibrium strategy.

3. The real-life example of the Coase theorem is if one person is using a window air-conditioner. That AC is installed at a place where its heat is causing problems to the person at the opposite location. Now, the Coase theorem suggests that this conflict can be resolved.

4. SHIRKING: If one is responsible for doing something but shirks from doing it.

FREE-RIDING: If one does not contribute while others do. That person is free-riding on all other's contribution.