microeconomic

12. In each of the following situations, explain how government
intervention could improve society’s welfare by changing people’s
incentives. In what sense is the market going wrong?
a. Pollution from auto emissions has reached unhealthy levels.
b. Everyone in Woodville would be better off if streetlights were
installed in the town. But no individual resident is willing to
pay for installation of a streetlight in front of his or her
house because it is impossible to recoup the cost by charging
other residents for the benefit they receive from it.
thank you

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  1. a. The government could impose higher taxes on cars that emit unhealthy emission levels. Both the companies and the car owners could be subject to this tax.

    b. Street lights are a city/town service. All building owners should be taxed for this service.

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    Ms. Sue
  2. Correction: All PROPERTY owners should be taxed for this service.

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    👤
    Ms. Sue
  3. Because of "externalities" the market is unable to allocate optimal amounts of driving or street lights.

    In a) a person personally bears a very tiny cost due to the auto pollution he produces. However, everybody else must bear this cost as well. The cost of pollution, in society, is not borne by the producer.

    Ditto but in reverse for b) The personal benefit from a person's own street light is small. however, everybody in the neighborhood benefits.

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