Distributed Friday, May 11, 2001; Due at start of class Wednesday, May 16, 2001

1. Define comparative advantage. Explain in plain English how it motivates Pareto-improving economic exchange, specialization of labor and even the creation of a monetary system.
2. We reviewed classical theories of government as arising from a "social contract" (Hobbes, Locke, Rousseau). Contrast the theory of social contract with Mancur Olson’s theory of government as evolved from "stationary banditry." (If you missed that lecture, refer to Olson, M. 2000. Power and Prosperity. Basic Books.)
3. Briefly summarize the philosophical premises of democracy vs. communism vs. fascism. Considering the inefficiencies of modern democracies that we reviewed in class (the arbitrary nature of voting systems, rational ignorance of voters; rent-seeking by special interests; log-rolling and pork-barrel politics; the capture of regulatory agencies by regulated industries, etc.) is democracy actually more economically efficient than communism or fascism? Why or why not?
4. Define Hotelling’s Rule. Explain how a competitive market depletes an exhaustible resource over time. Explain why this depletion model contradicts popular Malthusian "overshoot-and-collapse" forecasts based on simple reserve ratio calculations (for example, total reserves divided by annual consumption equals number of years until we run out).
5. Define the following: externality; public good; Coase Theorem. Under what conditions does Coasian bargaining fail to resolve an externality?
6. Every taxicab in New York City has to have a medallion (permit). Since the city issued these medallions more than fifty years ago, demand for taxi services has grown a lot, but the taxi lobby has prevented the city from issuing any more medallions. So now NYC taxis are expensive, scarce and smelly (because they’re in use 24 hours a day), and taxi drivers can be as rude as they want. If you want to drive your own taxi n NYC, buying the medallion off another cab will cost you about a million dollars. What determines the cost of taxi medallions? Can you think of a way to increase the supply (and quality) of taxi service in NYC without angering the taxi lobby?

(Essays do NOT have to be 500 words each. Allocate words so that marginal