Bill Miller

SECTION A

Attempt ALL questions in this section

The total for this section is 24 marks.

QUESTION 1

State Coase Theorem in the event of externalities and show how resolution can be achieved without public intervention. Do the existence of public goods violate the theorem?

(4 marks)

QUESTION 2

Discuss the deadweight losses that arise in the case of a monopoly. Discuss the theory of contestable markets and its implication for the need for regulation.

(8 marks)

QUESTION 3

Consider the following scenario for a conflict between Iraq and the United States in the Persian Gulf area.

• Iraq moves first and decides whether or not to invade Kuwait.

• If Iraq does not invade Kuwait, the game is over and Iraq receives a payoff of 0, while United States receives a payoff of 1000.

• If Iraq invades Kuwait, the United States must decide whether or not to send troops to Saudi Arabia.

• If the United States does not send troops to Saudi Arabia, then the game is over and the payoff is 1000 for Iraq, and 0 for the United States.

• If the United States sends troops to Saudi Arabia, Iraq must decide whether or not to leave Kuwait

• If Iraq leaves Kuwait, the game is over and the payoff is –1000 for Iraq (which is humiliated) and 500 for the United States.

• If Iraq decides to stay in Kuwait, the United States must decide whether or not to attack Iraq.

• If the United States does not attack Iraq, the game is over. The presence of US troops in Saudi Arabia is viewed as a farce, and the United States suffers a great loss of prestige, while Iraq claims to have conquered “the evil intruder.” Iraq therefore receives a payoff a payoff of 1000, and the United States receives a payoff of –700.

• If the United States attacks Iraq and wins the resulting war, the game is over. However, because the United States wins with great casualties, the payoffs are [pic] for the United States and [pic] for Iraq.

(a) Present...