Economics 211
Problem Set 4

1. What explains the wage gap between:
a) men and women?
b) blacks and whites?
c) union and nonunion workers?
d) college graduates versus high school graduates?
Use a graph of the labor market to aid in your verbal answer.

2. How might a union increase the demand for its members' labor?

3. Consider a labor market that is initially in equilibrium at a wage of $8 an hour and an employment level of 400 hours per day. Suppose that a union organizes and raises the wage to $12 an hour. Illustrate what happens to the level of employment in a graph of the labor market. Is there any unemployment? Explain and illustrate.

4. How might immigration influence wage rates? Consider both demand and supply effects.

5. If large numbers of immigrants leave a country where wages are relatively low and enter a country where wages are relatively high, what will most likely happen to wages in the two countries? Why? Illustrate your argument with the appropriate graph of the labor market in each country.

6. Some economists argue that discrimination based on race and sex cannot lead to persistant wage differentials. What is their argument?

7. How is statistical discrimination dif ferent from a prejudiced-based theory of discrimination?

8. Should high-school history and English teachers be paid as much as science and math teachers?
a) Suppose that a school district pays all high-school teachers with the same years of experience the same salary, regardless of teaching field, and that this produces a surplus of history and English teachers and a shortage of math teachers. Would this create a case for salary differentials?
b) How could the problem of concurrent surplus and shortages be solved without paying science and math teachers more than history and English teachers?

9. President Clinton wants stronger tax incentives to encourage more people to go to college and to remain in college longer. What are the economic arguments in favor of such a change in incentives? What are the arguments against it? Where do you come out on this issue and why?

10. If people are rational, how can public choice result in government actions with benefits that are less than the costs?

11. Art, Bob, and Charlie own a lake in Michigan that they use for recreational purposes. A mosquito abatement program will benefit all. Art place a value of $1, Bob places a value of $19, and Charlie places a value of $100 on a mosquito-free environment. A firm will spray the lake and charge each owner $35.
a) What decision would be reached under majority rule? Would the result be efficient?
b) What decision would be reached if Art, Bob, and Charlie could engage in costless negotiations? Could unanimity be achieved?

12. Suppose there are two classes made up of very similar students and students can choose which class they sign up for. In one class, each student receives the grade made on each test. In the other class, each student receives the class average as his or her grade. These policies are known by all. In what class would you expect the higher average grade? Explain.

13. An environmentalist argues that all pollution must be eliminated. How would you try to convince her that her position is both unreasonable and impractical?

14. Factory A produces 1000 tons of sulfuric acid at a cost of $10,000. For the people in the community, the production of 1000 tons of sulfuric acid causes an increase of $5000 in medical payments, a loss of $4000 in wages by being sick, and an increase of $1000 in dry-cleaning bills. What are the private and social costs of the 1000 tons of sulfuric acid? Show your work.

15. Take a monopolistic firm that produces a product that imposes external costs on the surrounding the community. Is this firm producing too much or too little?

16. Airport noise is certainly a negative externality. Why would people choose to live near airports?

17. A factory's production process creates sludge that pours into a river. This sludge makes it difficult to fish in the river, increasing the costs of the local fishermen by $4000. The factory can install a water filter system for $3500, and the fishermen can utilize a weighted fishing net system (to get under the sludge) for $2750. Both systems would remedy the sludge damage to the fishermen.
a) Suppose transactions costs are zero. If the factory is not liable and can continue to produce sludge, what outcome do you predict and why?
b) Suppose transactions costs are zero. If the factory is assigned liability for sludge damage, what outcome do you predict and why?
c) Now suppose transactions costs preclude the possibility of private bargaining between the factory and fishermen. If a pollution tax is levied on the factory with the proceeds given to the fishermen, then what outcome do you predict and why?
d) Discuss the results of parts (a), (b), and (c) in terms of the Coase Theorem.

18. Fishermen who use nets to catch tuna also sometimes net dolphins, which, because they are mammals, drown before they can be released. Currently, the price and quantity of tuna determined by the market does not take into account the cost to society of killing the dolphins (marginal external cost). Listed below are market demand and supply schedules for tuna as well as the marginal external social costs associated with dolphins killed in the process of catching tuna. All costs and values are listed in terms of dollars per pound of tuna.

a) What output and price would the free market generate? Why?
b) What is the socially optimal output and price? Why?
c) In order to obtain the socially optimal equilibrium, what would the appropriate per-pound tax on suppliers need to be? Of this tax, how much would consumers end up paying?

19. What is market failure and from what does it arise?

20. Why do some people who drink alcoholic beverages vote in favor of legal prohibition?

21. Suppose that the labor market for low-skilled workers can be described by the following equations:

Where L is employment measured in thousands of hours per day.
a) Draw a graph of the labor market (with W on the vertical axis and L on the horizontal).
b) What is the equilibrium wage and employment level for low-skilled workers?
c) Suppose that the workers can be trained--can obtain a skill--and their marginal productivity doubles. (The marginal product at each employment level is twice the marginal product of an unskilled worker.) But the compensation for the cost of acquiring skill adds $2 an hour to the wage that must be offered to attract the high-skilled labor. What is the equilibrium wage and employment for high-skilled workers?
d) Suppose that high-skilled workers become unionized and the union restricts the amount of high-skilled labor to 5000 hours. What would be the wage rate of high-skilled workers? What is the wage differential between low- and high-skilled workers?
e) If the government introduces a minimum wage rate of $6 an hour for low-skilled workers, how many hours of low-skilled labor gets hired each day?

22. A trout farmer and a pesticide maker are located next to each other on the side of a lake. The pesticide maker can dispose of wasted by dumping it into the lake or trucking it to a safe land storage site. The marginal cost of trucking is a constant $100 per ton. The trout farmer's total cost depends on how much waste the pesticide maker dumps into the lake and is as follows:

a) What is the efficient amount of waste to be dumped into the lake?
b) If the trout farmer owns the lake, how much waste will be dumped and how much will the pesticide maker pay to the farmer for each ton dumped?
c) If the pesticide maker owns the lake, how much waste will be dumped and how much will the farmer pay to the factory to rent space on the lake?
d) Suppose that no one owns the lake and that the government introduces a pollution tax. What is the tax per ton of waste dumped that will achieve an efficient outcome?
e) Suppose that no one owns the lake and that the government issues marketable pollution permits to both the farmer and the factory. Each may dump the same amount of waste in the lake, and the total that may be dumped is the efficient amount.
i) What is the quantity that may be dumped into the lake?
ii) What is the market price of a permit? Who buys and who sells?

23. The table below shows the citizens in a small democratic nation and their desired income tax rates. The political parties are trying to decide what income tax rate to propose as part of their policy packages.

a) Who is the median voter? What income tax rate will be proposed by the parties? Why?
b) Before the next election, Jacie changes her mind and decides that she wants an income tax of 50 percent. What income tax will now be proposed? How does this tax rate compare with that in part (a)? If it is different, why is it different? If it is the same, why is it the same?
c) Jacie continues to change her mind and before the third election she decides that she wants an income tax rate of 20%. Answer the same questions as in part (b) above.

24. The ships of 10 companies must navigate a treacherous section of coastline. Each year each shipping line incurs $200,000 in shipping costs from ships running aground there. If a lighthouse were builte, these costs would fall to zero. Building and maintaining the lighthouse would cost $1,900,000 a year. If it were constructed, all the ships that pass that way would benefit from the lighthouse and none would run aground.
a) From society's point of view, is building the lighthouse efficient?
b) From a company's point of view, if each company pays 1/10 the total cost of building a lighthouse, is it profitable?
c) Suppose that the lighthouse was constucted but that one company did not help pay for it. What is this company's profit from the lighthouse?
d) Based on your answers to parts (b) and (c), what incentive does each company have?
e) If one company decides not to pay for the lighthouse, will it be constructed?
f) What might the government do in this case?