# Explain the fundamentals of the Coase Theorem and where this theory

Part 1

1.

Explain the fundamentals of the Coase Theorem and where this theory

doesn’t work well:

2.

Voters have little incentive to pick the best candidate to maximize their

welfare. Explain why people don’t have enough motivations to do so and what’s the

result of it?

3.

“A company doesn’t make any decisions; the employees inside it make decisions.”

What theory does the sentence mention above? Explain this theory in a few sentences.

Extra Credit

4.

Three firms have marginal costs of pollution abatement as described below. Without

regulation, each firm would pollute 3 units. Under command and control regulation each

firm gets to pollute 1 unit. But the new Santorum administration decides that these permits

should be tradable among these 3 firms. Explain whether each firm buys or sells permits,

and show by how much each firm’s costs go up or down. What is the total effect of allowing

trading across all firms on the cost of pollution abatement?

Firm numbers

1

2

3

Amount of pollution

0

58

60

200

1

60

21

78

Part 2

2

63

58

16

5. The following graph is a supply and demand diagram.

A. Point out the producer surplus, the consumer surplus, the hidden cost

and the area that wealth from trade that is lost to society.

B. Does rent control actually helps the consumers to lower the price?

6.

Demand is given by : Q=50-1/2P

Supply is given by: Q=1/2P-5/2

a.

What is the equilibrium?

b.

Calculate the consumer surplus and the producer surplus?

7.

In most cities, if you wish to operate a taxi cab, you need a “barrier to

entry”, often referred to as a "medallion". Which type of barrier to entry is it

for a taxi in New York? What problems it has for this kind of entry. Explain

Extra Credit

1.

Disney land discovers that they have two groups of customers with

two different demand curves. Locals have demand P= 20-0.1Q and foreigners have

demand P=100-0.2Q. What is the profit maximizing set of prices? (The marginal

cost of visitors is zero.)

Part 3

1. Since carbon emissions from fossil-fuel combustion may be causing undesirable

changes in the earth’s atmosphere, we should adopt the "precautionary principle."

2. List three externalities that arise from consuming oil and three ways to replace

crude oil as a transport fuel.

3. Explain what "renewable portfolio standards" are and how they work.

Extra Credit

Do you think energy independence for the United States is a good or a bad idea?

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### Explain the fundamentals of the Coase Theorem and where this theory doesn’t work well:

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Part 1

1.
Explain the fundamentals of the Coase Theorem and where this theory
doesn’t work well:

2.