1. During the draughts that periodically plague California, farmers in


1. During the draughts that periodically plague California, farmers in that state are able to purchase subsidized water to irrigate their crops, while at the same time many California home owners have to pay large fines it they water their lawns. The water farmers have at a subsidized price may not be sold to desperate home owners by law. How would a price system for water work to alleviate the suffering of home owners, save taxpayers money, and avoid draughts?

2. Because rent controls reduce the rental price below the market clearing price, the quantity of rental units on the market must decline (meaning there are many frustrated renters). What does this imply about the full cost of renting an apartment including “key money,” harassment by the landlord, and so forth? Explain.

3. Some observers have proposed higher income and wealth taxes on the wealthy. Given that one’s wealth generally depends primarily on how much output one produces, how do these taxes affect the incentives of people who are the most productive? Assume that the proceeds of the taxes are given out to the poor. How does this affect their incentives? Overall, what do you predict will happen to the total income and wealth of society as a result of higher taxes such as these?

4. Women who own their own businesses earn net profits that are only half as large as the net profits earned by men who own their own businesses. First, consider why women would be willing to accept lower profits. Are they stuck with lower earnings because their wages (working for others) are lower? Alternatively, could this reflect other attributes of life that self-employment offers what women might find more advantageous than men do? Then, think about why women earn lower profits in business. Is this evidence of discrimination against women? If so, by whom? If not, what else might account for the lower profits?

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