1. “A reallocation from a point within the utility possibilities curve to a point on the utility possibilities curve results in a Pareto improvement”. Is this statement true or false? Explain and justify your answer. [10 MARKS] 2. Consider an economy which produces only two goods, computers and cars. Suppose a tax is imposed on the consumption of computers but not on cars. There are no taxes on producers of these goods. Explain why the economy will not exhibit e¢ ciency. [10 MARKS] 3. There are two individuals, A and B, who consume two goods, 1 and 2: Suppose that at a point on the production possibility frontier for the two goods, 1 and 2; the slope is 3. Suppose, also, that at the implied competitive equilibrium, the slopes of the indi¤erence curves of the two individuals are both equal to 8. Is this outcome Pareto e¢ cient? Explain. If not, can you suggest a Pareto improvement? [5+10=15 MARKS] 4. For each programme listed below, discuss what market failures might be (or are) used as a partial rationale for government intervention: (i) National defense (ii) Car insurance [10+10=20 MARKS] 5. (a) Explain why each of the following is or is not a pure public good: (i) Sewage collection (ii) Basic research (b) Compare and contrast the condition for e¢ cient provision of a public good with that of a private good. What is the problem with a market achieving e¢ ciency in provison of a public good?
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