Microeconomics 2 Essay
Word limit: 1,500
Explain, using a proper model, why economic theory predicts that the price of an exhaustible resource (such as oil) rises at the rate of interest. (20 marks)
Explain what may prevent this from occurring in the real world. (15 marks)
If firms producing the exhaustible resource decide to collude, what actions should they take to ensure that their cartel survives? (15 marks)
2.
What condition defines the optimal amount of a pure public good? (10 marks)
If the public good is a public park in a small village, how may a government go about trying to determine that amount?
Describe the possible shortcomings of the methods that the government may adopt. (20 marks)
If instead the public good is the world’s climate, what are the difficulties in defining the correct level of air pollution to aim for? (20 marks)
