Microeconomic Essay Example | Topics and Well Written Essays - 1000 words

Microeconomic - Essay Example It argues that if trade in the externalized cost is possible and there are no transaction costs and no substantial barriers to competition, bargaining over the externalized costs will lead to an efficient outcome. Poorly defined property rights and obligations or poor enforcement of those rights can lead people to shirk the obligation for damaging another's goods. Our polluting firm is harming the interests of local fishermen. Assuming a competitive market and the right of fishermen to the property either of the fish or of the water being polluted, the polluting firm will have to buy the rights to pollute either as a contract or buy the river fully. This will lead to an efficient result: Either the firm can't afford it, meaning that the social value of their product was transparently less than that of the fish; or it can, in which case the fishermen will get ample compensation for their trouble and society will get good X. If property rights belong to the polluter, then it is much ha rder for the social optimum to be achieved, as the polluter has little incentive to cooperate with the fishermen. Nonetheless, if the value of fish is high enough, then the polluter would have an incentive to buy the fish before the pollution has gotten too bad, and pay the local fishermen; if it isn't, then society didn't want the fish anyways (Mankiw, 2008, 217). Question #3: Risk averse preferences are preferences when faced with uncertainty to err on the side of caution. Risk averse agents, or agents with risk averse preferences, will choose a lower-risk scenario out of multiple scenarios, even if the ultimate outcome could be higher even after accounting for the risk. Consider a father trying to feed his family: He is not likely to tolerate an investment that has even a 5% chance of failure if that 5% chance could deprive him of feeding his family, even if the growth from that investment was in pure economic senses worth it. Risk averse preferences stem from scenarios whose ris k is more than is quantified economically: In the case of the father, the scenario where he can't feed his family has an infinite negative value. The certainty equivalent is the guaranteed, immediately available amount of money or value that an individual would view as equally desirable as a risky asset. Take a game where someone can play for $1000 or $0 or simply choose $500. Mathematical expectation says that the scenarios are identical, but the person playing wants guaranteed return: Thus, to make the show more interesting, it may offer only $250, meaning that $500 (or even a lower number up to $251) is a certainty equivalent. The risk premium is the amount of added value that a risky asset must bring. If an investment has a 1% chance to fail, I am likely to want a 1.5% growth rate on the investment at minimum so that over 100 years the failure of an individual year does not threaten my growth. Maximum willingness to pay for insurance is determined by these factors and others. It can be quantified mathematically: E.g. if I am offering a client a $1,000,000 life insurance policy, and he won't purchase the policy for less than $1000 annually, than that is his maximum willingness to pay (Besanko et al, 2010, 590-612). Question #4: Expected Utility: EU = (.8) * ? 100,000^.5 + (.2) * ? 50,000^.5 = 252.98221281347034655991148355462 + 44.721359549995793928183473374626 = 297.70357236346614048809495692925.