Economics 102 Microeconomics Problem Set 6

Economics 102
Microeconomics
Problem Set 6
Jubert A. Iloso 2018-09525 BSM-III May 17, 2021
Instructions: Write your answers on a sheet of yellow pad or type your answers in a
Word document.
A. For each of the examples below, please answer the following:
1. Does an externality exist? If so, classify the externality as positive/negative (or

both).
2. If an externality exists, determine whether the Coase theorem applies (i.e. is it
possible/reasonably feasible to assign property rights and solve the problem?)
3. If an externality exists and the Coase theorem does not apply, argue which of
the government’s tools are best suited to address the issue: quantity regulation,
taxes/subsidies, tradeable permits, or something else.
Examples:
1. China’s ongoing oil exploration and drills in the West Philippine Sea.
2. Carbon emissions from vehicles.
3. Your neighbor, Youngjae is throwing an awesome, but loud party with his bandmates.
4. Buying a car with added safety features that prevent the drivers’/passengers’ deaths
in the event of an accident
5. Bringing crying babies on a plane.
Answer:
1. China’s ongoing oil exploration and drills in the West Philippine Sea.
➢ Based on my assessment, the situation above creates both positive and
negative externalities. Positive externalities because through all exploration
and drills, they might be able to find an oil that our country can sell at a cheaper
price and at the same time can generate employment. On the other hand,
negative externalities may cause habitat destruction of all water creatures such
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as fishes due to wastage and contamination that this oil exploration and drilling
can do.
➢ So, in terms of the Coase Theorem, it is applicable. However, it might be
challenging to establish property rights due to a lack of evidence to show to
higher courts, and as they have said, weak states or countries such as the
Philippines cannot fight against big and strong countries such as China. So one
possible way of solving this problem is to gather enough evidence and data to
support our country’s claims. Then, both countries present their bargaining
agreement to internalize the externality.
2. Carbon emissions from vehicles.

➢ Based on my understanding, it creates a negative externality due to the
damaging effect of these emissions on people and the environment.
➢ In terms of the Coase Theorem, it is not applicable.
➢ One of the regulations that I think to solve this is to come up with a regulation
that will control emissions of vehicles. An emission permit is possibly very much
suitable in this situation to manage or avoid excess carbon emissions of
vehicles in the air.
3. Your neighbor, Youngjae is throwing an awesome, but loud party with his
bandmates.
➢ Based on my understanding, it creates a negative externality. It is due to noise
pollution that this loud party is creating in Youngjae's house.
➢ In this situation, Coase Theorem is not suitable to solve this kind of externality.
➢ One possible solution for this is to develop an ordinance, or barangay
regulation wherein those who want to conduct parties in their houses need to
ask for permits with some conditions such as avoiding being loud not disturbing
their neighbors.
4. Buying a car with added safety features that prevent the drivers’/passengers’
deaths in the event of an accident.
➢ Based on my understanding, this situation may possibly create a negative or
positive externality. Positive, since having a car with added safety features will
reduce road accidents. However, it can also be negative because some will still
drive recklessly and might cause road accidents if we have these added safety
features.
➢ In this situation, Coase Theorem is not applicable.
➢ I think quantity regulation or regulating the number of vehicles on the road can
possibly be a solution. Also, regulating the safety features can solve this kind
of externality.
5. Bringing crying babies on a plane.

➢ Based on my assessment, it can create a negative externality because of the
loud noise that can disturb other passengers.
➢ In this example, Coase Theorem does not apply.
➢ One possible government tool to address the issue is establishing tax or fare
hikes to those parents who will bring crying babies on the plane. Aside from
that, the airlines might be of help by lowering the price of tickets for those who
might be affected by the noise of the crying baby, or they can give freebies,
such as additional snacks, to those who are affected.
B. Adverse Selection
1. Describe the asymmetric information problem in the Philippine labor market. Who
has asymmetric information?
➢ Based on my research, the asymmetric information in the Philippine labor
market arises from a lack of access to the new incoming labor force to some
required information in the market. The real problem occurs whenever there
are new graduate students who are entering the labor market. Since they are
still fresh in the field, there are some skills and attitudes that they do not know
and some knowledge that they need to get. However, due to the very
competitive environment in the labor market, newly graduated students are
having difficulty and losing edge among those who have been in the labor
market for a very long time. Therefore, it only shows that asymmetric
information has already lead to discrimination.
➢ In my opinion, in the field of economics, buyers and sellers, and lender and
borrower are some who has asymmetric information. But, on the other hand, in
the labor market, laborer or employees has the asymmetric information.
2. In a used car market there are two types of cars: bad (B) and good (G). Assume
that the utility from a bad car is Ub= Php100, and the utility from a good car is Ug
= Php1000. Jaebeom, the owner of IGOT7 Used Cars Company, buys cars from
the general public for his lot (assume he just keeps them on his lot for now). The
owners of the cars who are selling to Jaebeom know the qualities of the cars they
are selling, but Jaebeom does not.
a. If car type is observable, what is the price paid for good and bad-type cars?
b. Describe the equilibrium in the market assuming that Jaebeom can only offer
the same buying price to any car in the market (i.e. cannot discriminate among
sellers). What is the equilibrium used car price?
Answers:
a. As the situation said, since the car type is observable, both Jaebeom and
the buyers know the type of the car. Therefore, it only shows that the car
market has a perfect information competitive market. Thus the price will
be:
Pg=Ug
Pb=Ub
: Pg= P1,000
: Pb= P100
b. Using the formula in Equilibrium with Pooling,
EU= ½ (Ub) + ½ (Ug)
= ½ (100) + ½ (1,000)
= 50 + 500
= 550
➢ With this offer price, only the owners of bad car will be willing to sell the
car. Thus, Jaebeom will be offering the price of only the bad car of
Pb=P100.
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Economics 102

Jubert A. Iloso 2018-09525 BSM-III May 17, 2021

1. Does an externality exist? If so, classify the externality as positive/negative (or

2. Carbon emissions from vehicles.

5. Bringing crying babies on a plane.

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