Coursework Assignment Resit Part 1

Instructions:

• This assignment is relevant to Part 1 of the course and carries a weight of 50% of your resit mark.
• Answer ALL questions. This assignment has three (3) questions for a total of 100 marks.
• This is an individual and independent coursework.
• You should submit it on Blackboard. Your answers must be typed. Handwritten answers will not be accepted, however graphs may be hand drawn within the typed up document.
• The deadline for submission is 4pm, August, 2017. Late submission will be penalised according to the standard university penalty.

(1) The following is the schedule of the marginal private cost (MPC) and marginal private benefit (MPB) for a coal burning power plant. The plant generates air pollution as a by-product. The external costs associated with this air pollution are equal to the marginal private cost. (30 marks)

Quantity                     MPB / MSB                     MPC                        MSC
1,400                                  50                                125                            250
1,300                                100                               100                            200
1.200                                150                                  75                             150
1,100                                200                                 50                             100

a) Plot the MPC and MSC to scale. (5 marks)
b) What is the equilibrium without government intervention? (5 marks)
c) What is the value of the deadweight loss? (5 marks)
d) If the government levies a flat tax to bring the equilibrium in line with the socially optimal level, what is the appropriate value of the tax? (5 marks)
e) Considering your findings in a-d above, why do you think it is important for governments to control the level of externalities in their economies? (10 marks)

(2) Explain how an increase in the rate of tax on personal income might reduce the government’s total tax revenue. Refer to the underlying reasons why this effect may occur. Use a graph to illustrate your explanation. [30 marks]

(3) In their 1974 paper, Judgement under uncertainty; Heuristics and Biases, Tversky and Khaneman, put forward the idea that people often make systematic errors of judgement. What type of examples do they present as evidence? What can we conclude from this paper? (Maximum 300 words) (40 marks)