Question

1. Suppose that war in the Middle East disrupts oil production, reducing the supply of oil by 20%. The central planner of a government decides to economize on oil. a. What should a central planner do to economize on oil? b. What information does a central planner have to collect in order to economize on oil? c. What may cause a central planner to fail to economize on oil?

2. In the past few years many state governments have made it illegal to smoke inside public buildings (restaurants, subways stations, etc.). Using the concept of externalities, explain why governments are taking these measures and explain whether the solution ensures an efficient outcome.

Answer 1

1. a.As there is scarcity of oil central planner should take important step to economize oil which means to use oil carefully.One way is to use oil for those purposes where there is no alternatives or substitutes.Shifting of oil use to be done from the low valued uses to high valued uses.For example if a machine runs with either oil or battery than we can shift the use of oil from there as it can be run by battery also.We can use that oil for and high valued use.Central planner can make law and order for the implementation of the same.

b. A central planner have to make a survey regarding the use of oil that is where and how much oil is being used.After getting this information only central planner can take any decision regarding the economization of oil.

c. If central planner is unable to get the information regarding the use of oil he cannot take initiative to shift the oil from low use value to high use value of oil.Again there is a chance of getting wrong information because everyone may say that they are using the products where they must need oil.So if central planner will not get the information correctly  it may cause a central planner to fail to economize on oil.

2. Smoking has negative externality. Smoking creates gas which has a negative effect on the other people because it pollutes the environment.Smoking is not good for health.Smokers are throwing Cigarette butts anywhere which creates litter.If government make it illegal it can save the people who are not smoking but with an contact of the polluted environment are getting sick out of it.It can also reduce the litter.Again healthy workplace is required.Smoking will pollute it.So a ban is necessary.

Ban of smoking in public places do have a significant outcome.Due to this step many diseases which results from smoking has reduced.The risk of heart attack has reduced.Second hand smoking is very dangerous for heart.So this ban has reduced this problem.Clean environment is required for healthy life.