1. Suppose the marginal social cost of fighter aircraft each year exceeds their marginal social benefit. Are fighter aircraft being produced at an efficient level?
2. The marginal social benefit of college enrollments currently exceeds its marginal social cost. Use a graph to demonstrate the gain in efficiency that would result from an increase in college enrollment.
3. The price of automobiles currently equals both the marginal social benefit and the marginal social cost at existing annual output. A tax is levied on the sale of cars. Assuming that the tax increases the marginal private cost of sellers, show how it will cause a loss in efficiency in the automobile market.
4. Efficiency can correspond to more than one distribution of well-being. Can the efficiency criterion be used to rank one distribution over another?
5. Explain the compensation criterion of Kaldor and Hicks. How do they justify income redistribution? Use different points on Figure 2.5 to explain their conclusion.
Points on the utility-possibility curve indicate the maximum level of well-being for any one person, A, given the level of well-being of any other person, B. Points E1, E2, and E3 are efficient. Point Z is unattainable. Point X is inefficient. However, a movement from X to E3 will be opposed by A because it would make him or her worse off.