Question

ECN 100B 2 Short answers

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

2.12 What are rivalry and exclusion and what are the four classifications of goods based on these properties?

2.13 How can the government fix open-access commons problems?

2.14 What is free riding?

2.15 What are four ways free riding can be reduced?

2.16 What is the expected value when rolling a six-sided dice in which you are paid $2 times the number that is rolled? What it the variance of this EV?

2.17 What is a fair bet?

2.18 What are the three attitudes towards risk and how are they each defined?

2.19 How do the certainty equivalent and risk premium relate?

2.20 What are the two major types of opportunistic behavior we discussed in class? Define each of them.

2.21 What are three ways to reduce adverse selection by equalizing information?

2.22 What are three common ways governments and organizations prevent opportunism with laws?

2.23 What is the tourist-trap model?

2.24 What is a principal-agent problem? What are three common types of contracts between principals and agents?

2.25 What is an incentive compatible contract?

Answer 1

2.11. The Coase theory addresses that how effectively private market can deal with externality. It states that private parties can solve the problem of externalities on their own if they can bargain over allocation of resources. In real life examples we can say a fish market and a coffee shop exist side by side. The smell of fish market affecting the customers of coffee shop. For this the fish market installed a air cleaner so that the smell do not goes outside. For purchasing this air cleaner coffee shop paid a certain amount. Another example in a building there is one side glass and this glass reflecting the sun shine and it is affecting the vegetable garden of a nearby house. For this reason a certain amount of compensation are given to the vegetable garden owners.

2.12. Rivalry and exclusion are related with private and public good. Rivalry means there will be a rival between two parties to consume or to buy or to use that particular good or service. If there is rivalry there will be exclusion. It means one party will be excluded from use that particular good or service. Based on this property of rivalry and exclusion the four type of goods are - I) Non-exclusive and non-rivalary, ii) Non-exclusive but rivalry , iii) Exclusive but non-rivalary, iv) Exclusive and rivalry.

2.13. The open access common problem is a major challenge to the government. The government can fix the problem through using various policies like government can imposes a fees and taxes on the basis of use that common resource. The government can fix the problem through assigning property rights and build a restriction to use of that resource. Government can solve this open access through opinion and try to reach in a solution.

2.14. Free riding is a scenario when an individual or group of individuals are using the resources without paying for it. It means when people use a resource with out paying for this benefit. It is a problem to society because when the people use that public resources but do not pay for that public resource.