pace university|economics 310|yarbrough spring 2019 – assignment 1
1 Negative Externality
Suppose that the private market for widgets is characterized by the following supply and inverse
demand functions:
D : P = 10−Q
S : P = Q
1. Graph these functions in the graph paper below. Locate the private market equilibrium price
and quantity.
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pace university|economics 310|yarbrough spring 2019 – assignment 1
2. Now suppose that the EPA calculates that the marginal external cost of widget production is
characterized by: MD = $2. Graph the market with the externality and locate the the socially
e�cient equilibrium. How much dead weight loss was produced by the private market.
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pace university|economics 310|yarbrough spring 2019 – assignment 1
3. Now suppose that the EPA revises their MEC estimate to: MD = Q. Graph the market with
the externality and locate the socially e�cient equilibrium. Compare this with the outcome
from part 2.
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pace university|economics 310|yarbrough spring 2019 – assignment 1
2 Public Goods
Suppose that the private market demand for public-access park acres in the town of Yarbroughville
(Q) is characterized by the following two types of voters (old and young):
Dold : Q = 10−P
Dyoung : Q = 8−P
Further, assume that the marginal cost of supplying acres of public-access park is:
MC : Q = 0.25P
1. If park acres would be determined by a private market, how many acres are bought and sold?
To determine this, plot the two demand curves separately, and then sum them horizontally to
plot a market demand curve. Then �nd the private market equilibrium.
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pace university|economics 310|yarbrough spring 2019 – assignment 1
2. Instead, assume that park acres are determined by a public vote based on willingness to pay.
How many acres of public-access park are socially e�cient? To determine this, again graph the
two demand curves separately and then sum them vertically to plot a public demand curve.
Now locate the socially e�cient equilibrium.
3. Brie�y explain why it is that the private market supplies less public-access park acres than
would be supplied if they were o�ered publicly.
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pace university|economics 310|yarbrough spring 2019 – assignment 1
3 Cost-Bene�t Analysis
Pace University is deciding between two projects.
A) Full HVAC system overhaul, which costs $1 million and will reduce general energy cost to the
university of $300,000 per year. There are no costs beyond period 0.
B) Placing a wind farm on top of 1 Place Plaza, which costs $10 million and will reduce general
energy cost to the university of $3 million per year. There are $500 thousand per year of upkeep
cost for the windmills.
1. Assuming a discount rate of 5% and time periods as years, what is the NPV of each project
after 5 years.
2. Answer part 1 again, but assume a discount rate of 10% instead.
3. Comment on the values calculated in parts 1 and 2.
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