- During the 1800s in the Western United States, cattle were being consumed in larger quantities than bison, yet bison nearly became extinct while the
population of cattle grew. Explain how these facts can be reconciled.
- Draw a Supply and Demand graph for a competitive market in coal. Draw what happens when there is a negative externality from pollution, i.e. a situation
where the Marginal Social Cost is higher than the Marginal Private Cost. Show how a tax on coal producers could lead to a more efficient outcome.
- Draw a Supply and Demand graph for the market for coal again, with a negative externality, but this time assume the market is monopolistic (hint: think
about how a monopolist sets output and price). Show how a tax on producers could lead to a less efficient outcome.
- Why is the free rider problem an example of the Prisoner's Dilemma?
Sample Solution