Question

 

1. “Both private goods and club goods are excludable, so there are no reasons for the government to regulate or tax private goods and club goods producers.” Do you agree with this statement? Justify your answer.

2. Explain why does an increase in the price of ivory threatens the elephant population in Africa, while an increase in the price of beef protects the cow farms in Texas.

3. “When the market-equilibrium quantity of good “x” is larger than the socially-optimal quantity of good “x,” the production of good “x” conveys a positive externality.” Do you agree with this statement? Explain your answer

Thank you!

Answer 1

Answer 1:

It is true that both club goods and private goods are excludable because only those who pay for usage of these goods are able to derive benefit from these goods. Thus, government intervention to regulation the optimum level of club goods and private goods is not needed in the market of these goods. However, in some cases where the good is harmful for people like tobacco or in case of club goods where the good is non rival in nature, goods needs to tax these goods in the interest of people to prevent over use of the good.

Answer 2;

As the price of ivory increases, the elephant population is at threat because it is an important part of elephant's body and people will start hunting for elephant to collect ivories and this reduces elephant's population in the area. As price of beef increases, demand for beef will decrease in the market and as demand decreases, the producers will be less willing to sell their product in the market and thus sale of beef decreases which helps in protection of cow farms in Texas.

Answer 3:

Yes, the statement is true. When the market equilibrium quantity of good X is larger than the socially optimal quantity of good X because external damage caused by the good is not taken into consideration, then production of good X conveys negative externality. Taxes are imposed to increase cost of production and move the socially efficient level of quantity equal to market efficient level of quantity.