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Question: Let's look at the market for bicycles. Suppose the inverse demand and inverse supply curve for bicycles were given by the following two equations respectively:
PD = 4, 800 - 0.4QDPS = 300 + 0.1QS
a) Determine the free market equilibrium price for bicycles in this market, and the amount of bicycles that are sold. Calculate the consumer surplus and producer surplus.
b) Suppose the government imposed a tax of τ = $200 on the price of a new bicycle. Calculate the new equilibrium in this market. This includes findingThe new equilibrium quantity sold.The price paid by consumers.The price received by firms.The consumer surplus.The producer surplus.The amount of tax collected by the government.The deadweight loss.
c) Suppose the government promised to rebate all the tax collected to consumers who purchased a bicycles. Would this make the consumers in favour of the tax? Would this represent a Pareto efficient outcome?
Question: Explain why the free rider problem makes it difficult for perfectly competitive markets to provide the Pareto efficient level of a public good.
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