Microeconomics - Assignment Example

These goods are traded in the market where the buyer and seller first agree on a price level and then the buyer acquires the good. Thus, consumers have to pay for the good in order to acquire its benefits. Cars and cell phones are examples. In contrast, a public good is one that is available for all and does not necessarily need to be acquired by paying for it. For example, street lights or a light house benefit all instead of one person. The increase in the number of public goods by the government helps it to cut across the system of class disparity and allows everyone to benefit from them without actually paying for the goods.

The government thus produces public goods to increase the social welfare of the society. Ans 3) Private goods are paid for by the consumers in order to get ownership of the good. Thus, only the person buying it acquires all the benefits. However, the free rider concept comes into play when one entity such as the government is responsible for providing all the benefits that are equally shared by the people. An example of this can be bridges and roads that are used by everyone while the government builds them. Ans 4) The optimal quantity of pollution can never be zero because any production activity in the economy makes pollution an unavoidable spillover effect.

For instance, a car manufacturing company will cause air pollution and for an economy that is operating on a free market basis with no government intervention, even though the cost of the pollution will not be borne by the company, it will be a byproduct of that production process. Thus at any point, the optimal quantity of pollution can never be zero unless all forms of economic activity are halted (Mankiw, 2002). Ans 5) Increasing the gas tax would have a number of adverse effects. Firstly, the cost of other goods will increase with the increase in gas tax.

The automobile, aviation and shipping industry rely heavily on gas and will raise their prices in accordance to the increase in tax so that the costs can be covered. In addition to this, the purchase of automobiles will decrease since the gas tax would result in a higher cost of the car for the consumer. Secondly, the demand for gasoline is considered to be inelastic in the short run. This means that the gas consumption would not decrease with an increase in gas prices. Therefore, an increased gas tax would be a further strain on the costs of manufacturers and consumers.

Also, this increase would be reflected on specifically the lower and middle income groups that own fewer vehicles than the higher income group. People in rural and remote areas depend on public transportation and thus a high gas tax would be unfair to the low income groups (O’Sullivan & Sheffrin, 2005). Ans 6) Pollution is defined as damage or harm caused to the environment that we live in. A pollution tax will thus reduce pollution by making large and small organizations to take responsibility for the pollution their economic activities cause.

The revenue from these taxes can be used to take measures to eliminate the pollutants that are responsible for harming the environment. For instance, a carbon emission tax can allow the government to invest in projects that reduces industry pollution such as CCS (Carbon Capture and Storage). Moreover, a pollution tax will balance the pollution costs that many organizations may not incorporate in their production proces