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Externality Case Study Essay

What is the equilibrium wage? _$60,000_________________________ Now, consider this scenario: Due to an increase in the internet security threats, the government wants to apply a price control in this market to encourage more people to become internet security professionals. Assume that a wage control is set at $75,000. Will this increase the number of people entering this labor market? Why or why not? Will this increase the number of people hired?

Why or why not? It will increase the number of people entering this labor market because of the increase of pay from the equilibrium will be enticing, but this will cause a shortage in the labor market. Because the number of people entering this labor market has increased, there will not be enough positions for them. Due to this, the number of people hired will decrease. Also, another factor to take into account is the budget for the companies for these positions. If the equilibrium is set at $60,000 the company might not be in a position to increase the pay rate to accommodate the price control, thus causing them not to be able to fill those positions.

2. Assume you are a policymaker in Washington DC. Lobbyists for the preschoolers of America have put pressure on their representatives to cap prices on graham crackers. You have been assigned a position on a new committee to study the impact of a price ceiling on graham crackers.

Your job is to:

a.) Illustrate using a fully labeled supply and demand graph (label all the axes and any lines you put in your graph) what such an artificial price looks like. b.) Explain what the results of such a move are for the graham cracker market. In other words, will there be a SHORTAGE, a SURPLUS, or neither created? Why?

b.) There will be a shortage created. Initially the public might be happy about the price ceiling, but soon after the sellers will begin to ration the graham crackers based on other factors since the one most willing to pay will no longer be a factor. Also, this might cause consumers to stand in long lines in order to be able to purchase the graham crackers, but since there are not enough graham crackers supplied, not everyone will be able to purchase the graham crackers. In the end, producers will move on to produce other products that are more profitable than graham crackers, worsening the shortage.

3. Pollution is considered by most a negative externality. Some economists would like to see the costs of these burdens incorporated into the price of goods that we buy. For instance, since coal fire power plants increase emissions that could potentially lead to climate change, these economists believe that the price we pay for electricity is not adequately high enough. Draw a completely labeled graph and illustrate on the graph how much higher electricity prices would be if the full costs of electricity production were taken into account. You do not need to provide actual numbers; rather, show on the price axis where the price would be before the externality is considered and the price after the externality is included. What problems might exist in determining this new, externality based, price?

People might not be able to afford the new prices if the external costs are included which may lead to the consumers to look for alternatives in power source. Some of these alternatives may include using more archaic versions such as firewood or coal, which may increase pollution. Or they might be lead to steal electricity or use the black market for alternative power source.

4. In the old days lighthouses were built along the coast to prevent ships from running aground on rocks in unfamiliar ports. By shining a beam of light over a port and guiding ships away from rocks, these vital buildings reduced the risk for ship captains and were generally considered to be extremely valuable resources. Curiously, lighthouses were almost always run and maintained by local governments. Explain in economic terms why private firms would not run a lighthouse. A private firm would not run a lighthouse because it is considered a public good. The lighthouse is non-excludable since the private company cannot exclude anyone from using the lighthouse.

It is also non-rivalrous since the quality does not go down if other ships or companies use the lighthouse. If a private firm built a lighthouse, eventually other businesses will use the lighthouse to travel to the port causing the private firm to be upset about the other firms taking advantage of its use. Since the private firm would not be interested in building lighthouses because it is non-excludable and non-rivalrous, it would be in the governments best interest to use its resources (taxes and such) to build the lighthouse. This in turn will help improve the economy since the companies can now bring their supplies without fear of losing their ships in the night.


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