1.

Define Pareto Optimality and provide an example of a

Pareto improvement.

Answer:
Pareto Optimality (or Pareto Efficiency) is a state of resource allocation
in which it is impossible to make any individual better off without making
at least one other individual worse off. It represents an economic situation
where resources are distributed in the most efficient manner, leaving no
room for mutually beneficial trade or reallocation.

Example of a Pareto Improvement:

Suppose two students, A and B, have lunch boxes. Student A has a
sandwich but dislikes apples, while Student B has an apple but dislikes
sandwiches. If they swap the sandwich and the apple, both become better
off without harming each other. This exchange is a Pareto
improvement because it increases utility for both parties without
reducing anyone’s welfare.

2. What is the Scitovsky Paradox? How does it challenge the

Kaldor-Hicks criterion?

Answer:
Scitovsky Paradox refers to a situation where a proposed policy change
satisfies the Kaldor-Hicks compensation criterion (i.e., winners could
hypothetically compensate losers and still be better off), but the reverse
policy change (returning to the original state) also satisfies the same
criterion. This creates a logical inconsistency, making it impossible to
determine whether the policy improves social welfare.

Challenge to the Kaldor-Hicks Criterion:

The paradox undermines the Kaldor-Hicks criterion by revealing that it
can produce contradictory recommendations. For example:

 Policy X → Y: Winners gain ₹100, losers lose ₹80. Kaldor-Hicks

supports this change (winners can compensate losers).
 Reversal Y → X: New "winners" (original losers) gain ₹80, and
"losers" (original winners) lose ₹100. Kaldor-Hicks also supports
reversing the policy.
This circularity shows that Kaldor-Hicks fails to provide a consistent
measure of welfare improvement, as it depends on the initial
distribution of resources.
Key Features of the Answers:

1. Concision: Direct definitions and examples without unnecessary

details.
2. Structure:
o Definition → Explanation → Example (for Q1).
o Definition → Logical Critique → Illustration (for Q2).
3. Application: Real-world analogies (e.g., lunch boxes, compensation
scenarios) to demonstrate understanding

3. Explain the role of the Walrasian auctioneer in general

equilibrium theory.

Answer:
The Walrasian auctioneer is a hypothetical entity in Léon Walras’
general equilibrium model that acts as a neutral price adjuster to achieve
market equilibrium across all markets simultaneously. Its roles include:

1. Tâtonnement (Groping Process): The auctioneer calls out trial

prices and collects supply/demand responses from buyers and
sellers.
2. Price Adjustment: If excess demand exists (demand > supply),
prices are raised; if excess supply exists (supply > demand), prices
are lowered.
3. Equilibrium Coordination: The process continues until a set of
prices is found where all markets clear (supply = demand in every
market).

Example: In a two-good economy (apples and oranges), the auctioneer

adjusts prices iteratively until no excess demand/supply remains for
either good.

4. How does asymmetric information lead to market failure

in the health insurance market?

Answer:
Asymmetric information occurs when one party (e.g., insurers) has less
information than the other (e.g., buyers). In health insurance:
 1. Adverse Selection: High-risk individuals (e.g., chronic patients)
are more likely to buy insurance, but insurers cannot perfectly
assess risk.
2. Market Failure: Insurers raise premiums to cover high-risk claims,
driving low-risk individuals out of the market. This creates a “death
spiral” where only high-risk buyers remain, making insurance
unprofitable or unavailable.

Example: If a health insurer charges an average premium, healthy

individuals may opt out, leaving only sicker patients. The insurer then
raises premiums further, worsening the cycle.

5. Define quasi-rent and distinguish it from economic rent.

Answer:
Quasi-rent is the temporary surplus earned by a factor of production
(e.g., machinery, specialized skills) in the short run when its supply is
fixed. It arises when the factor earns more than its transfer earnings
(opportunity cost) due to temporary scarcity.

Difference from Economic Rent:

 Economic Rent: Permanent surplus earned by a factor (e.g., land)

due to its perfectly inelastic supply in the long run.
 Quasi-Rent: Short-term surplus for factors with fixed supply
temporarily (e.g., a factory during a production cycle).

Example: A farmer’s tractor generates quasi-rent during harvest season

when demand is high. In contrast, land in a prime location generates
economic rent indefinitely.

6. Why does the kinked demand curve model predict price

rigidity in oligopolies?

Answer:
The kinked demand curve model assumes:

1. If a firm raises prices, rivals do not follow, leading to a large loss in

market share (elastic demand).
2. If a firm lowers prices, rivals match the cut, resulting in minimal
gain in market share (inelastic demand).
This creates a kink at the prevailing price, causing a discontinuity in the
marginal revenue (MR) curve. Firms avoid changing prices because:

 Raising prices reduces revenue (elastic segment).

 Lowering prices triggers a price war, shrinking profits (inelastic
segment).
Thus, prices remain rigid even with cost changes.

7. State Arrow’s Impossibility Theorem and its key

assumption.

Answer:
Arrow’s Impossibility Theorem states that no social welfare function
can convert individual preferences into a coherent societal ranking while
satisfying all of these conditions:

1. Non-dictatorship: No single individual dictates societal

preferences.
2. Universality: Works for any set of individual preferences.
3. Independence of Irrelevant Alternatives: Societal ranking of A
vs. B depends only on individual A vs. B rankings.
4. Pareto Efficiency: If everyone prefers A over B, society must
prefer A.

Key Assumption: Individual preferences are ordinal and non-

comparable (no interpersonal utility comparisons).

Group B (Analytical/Numerical), formatted for exam requirements:

1. Welfare Economics

Question: Suppose a policy increases Person A’s utility by 20 units but

decreases Person B’s utility by 15 units. Can this policy be justified under
the Benthamite and Rawlsian criteria?

Answer:
Benthamite (Utilitarian) Criterion:

 Bentham’s philosophy maximizes total utility.

 Total utility change = 20 (A’s gain)−15 (B’s loss)=+5.
  Conclusion: The policy is justified because total societal utility
increases.

Rawlsian Criterion:

 Rawls prioritizes improving the worst-off individual (maximin

principle).
 If Person B is the least advantaged, their utility decreases ( −15),
worsening their position.
 Conclusion: The policy is not justified unless the loss to B is
compensated to maintain/improve their welfare.

Example: A tax cut for high-income groups (A) funded by reducing

subsidies for low-income groups (B) would fail Rawls’ test.
3. Market Failure

Question: Compare Pigovian taxes and Coasian bargaining as

solutions to industrial pollution. Why might Coasian solutions fail in Nepal?

Answer:
Pigovian Taxes:

 Mechanism: Tax polluters equal to the marginal external

cost (e.g., ₹100/ton of CO2).

 Outcome: Internalizes externality, reduces pollution to socially

optimal level.

 Pros: Government-controlled, predictable.

 Cons: Requires accurate cost measurement; risk of regulatory

capture.

Coasian Bargaining:

 Mechanism: Affected parties negotiate if property rights are

assigned (e.g., farmers can sue factories for pollution).

 Outcome: Efficient solution if transaction costs are low.

 Pros: Market-driven, flexible.

 Cons: Fails with high transaction costs or unclear property rights.

Why Coasian Solutions Fail in Nepal:

1. High Transaction Costs: Many affected parties (e.g., Bagmati

River pollution).

2. Weak Property Rights: Informal land ownership complicates legal

claims.

3. Information Asymmetry: Polluters hide data; victims lack

resources to negotiate.

4. Example: Factories in Biratnagar emitting waste face no

accountability due to poor enforcement of property rights.

5. Input Markets:
 1. A monopsonist faces a labor supply curve W=10+2LW=10+2L.
If the MRP of labor is 60−L60−L, calculate the profit-
maximizing wage and employment level.

6. Oligopoly:
1. Solve a Cournot duopoly where market demand
is P=120−QP, and both firms have MC=30. Find equilibrium
output, price, and profits.
1. General Equilibrium:
o Explain the excess demand function approach to proving
the existence of equilibrium in a Walrasian system.

2. Welfare Economics:
 o Critically evaluate the Bergson-Samuelson Social Welfare
Function. What are its limitations?

Answer:
The Bergson-Samuelson SWF aggregates individual utilities into a
social ranking W(U1,U2,...,Un).

Strengths:

 Provides a framework for ethical judgments (e.g., utilitarianism vs.

Rawlsianism).

 Enables analysis of trade-offs between equity and efficiency.

Limitations:

1. Arrow’s Impossibility Theorem: No SWF can satisfy all

democratic axioms (universality, non-dictatorship, etc.).

2. Interpersonal Utility Comparisons: Requires cardinal,

comparable utilities, which are unrealistic (utilities are ordinal).

3. Subjectivity: Choice of SWF reflects arbitrary ethical values (e.g.,

utilitarian vs. egalitarian).

4. Information Constraints: Requires full knowledge of individual

utilities, which is unobservable.

5. Implementation Challenges: Even if a SWF exists, policy-makers

cannot measure utilities or enforce optimal allocations.

Example: A utilitarian SWF (W=∑Ui) might justify inequality if it raises

total utility, while a Rawlsian SWF (W=min(Ui)) would reject such trade-
offs.

Conclusion: While theoretically elegant, the Bergson-Samuelson SWF is

impractical for real-world policy due to informational, ethical, and
democratic constraints.

Key Takeaways:

 Excess Demand Approach: Relies on mathematical rigor (fixed-

point theorems) but abstracts from real-world price adjustment
processes.
  Bergson-Samuelson SWF: Highlights the tension between
theoretical welfare economics and practical policy-making.

Case: Nepal’s government plans to build a hydropower plant that

displaces local communities.
Tasks:

1. Analyze the project using Pareto optimality and Kaldor-Hicks

compensation.

2. Suggest policies to address welfare losses.

Answer

1. Analysis Using Welfare Criteria

a. Pareto Optimality:

 A hydropower project is Pareto efficient only if it makes at least

one person better off without making anyone worse off.

 Displacement Impact: Local communities lose land, livelihoods,

and cultural heritage. Since some are worse off, the project fails
Pareto optimality.

 Example: If 1,000 households are displaced without compensation,

the project violates Pareto efficiency.

b. Kaldor-Hicks Compensation Principle:

 The project can be justified if the winners (government, urban

consumers) gain enough to hypothetically compensate the losers
(displaced communities).

 Calculation:
o Gains: Hydropower revenue (e.g., ₹10 billion), energy access,
economic growth.

o Losses: Displacement costs (e.g., ₹2 billion in lost livelihoods,

resettlement).
 o Kaldor-Hicks Test: If ₹10B > ₹2B, the project is socially
desirable if compensation is feasible.

 Challenge in Nepal: Compensation is rarely paid fully due to

corruption, weak governance, and bureaucratic delays.

c. Scitovsky Paradox Risk:

 Even if the project passes Kaldor-Hicks, reversing it (demolishing

the plant to restore land) might also pass Kaldor-Hicks, creating
a welfare paradox.

2. Policy Solutions to Address Welfare Losses

a. Mandatory Compensation:

 Full Cash Compensation: Pay displaced families at market rates

for land and assets.

 Example: Nepal’s Land Acquisition Act 1977 mandates

compensation, but implementation is weak. Strengthen
enforcement.

b. Benefit-Sharing Mechanisms:

 Equity Shares: Allocate 5–10% of hydropower shares to displaced

communities (e.g., Nepal’s Upper Karnali Hydropower model).

 Royalty Distribution: Direct 20% of project royalties to local

infrastructure (schools, hospitals).

c. Resettlement and Livelihood Restoration:

 Skill Training: Train displaced farmers in tourism or forestry jobs.

 Example: India’s Sardar Sarovar Dam included resettlement

colonies and vocational programs.

d. Independent Oversight:

 Create a Hydropower Welfare Commission with local

representatives to monitor compensation and environmental
safeguards.
e. Second-Best Solutions:

 If full compensation is unfeasible, use targeted subsidies (e.g.,

free electricity, healthcare) for displaced families.

3. Conclusion

While the hydropower project may satisfy Kaldor-Hicks efficiency in

theory, Nepal’s institutional gaps risk leaving displaced communities
worse off. A hybrid approach—combining compensation, equity sharing,
and participatory governance—can align the project with Pareto
improvements in practice.

Key Features:

 Application of Theory: Links welfare economics to Nepal’s

hydropower challenges.

 Policy Specificity: Proposes actionable, Nepal-relevant solutions.

 Critical Analysis: Highlights gaps between theory and practice.

1. Explanation Using Public Goods Theory and Rent-

Seeking

Market Failure & Public Goods:

a. "Nepal’s public education system suffers from free riding and
underfunding."
i. Explain this using public goods theory and rent-
seeking behavior.

Propose a second-best solution for improving access and quality

a. Public Goods Theory:

While education is not a pure public good (it
is excludable and rivalrous), Nepal’s public education system functions
as a quasi-public good due to government provision. Key issues
include:
  Free Riding: Households benefit from subsidized education without
adequately contributing (e.g., tax evasion or fee avoidance), leading
to underfunding.
 Non-Rivalry Limits: Overcrowded classrooms and scarce
resources (e.g., textbooks) create rivalry, reducing quality.

Example: Parents in rural Nepal may avoid local taxes but still enroll
children in public schools, straining limited budgets.

b. Rent-Seeking Behavior:

 Corruption: Officials divert education funds for personal gain (e.g.,

inflating procurement costs).
 Elite Capture: Influential groups lobby for urban-centric school
investments, neglecting marginalized regions.

Example: A 2020 audit found NPR 2.5 billion misused in Nepal’s

education sector, highlighting systemic rent-seeking.

2. Second-Best Solutions for Access and Quality

a. Improve Tax Compliance and Local Funding:

 Community Co-Financing: Require households to contribute

modest fees or labor for school maintenance, reducing free riding.
 Example: Uganda’s "School Management Committees" increased
accountability and reduced absenteeism.

b. Anti-Corruption Measures:

 Digital Tracking: Use blockchain or open-data platforms to

monitor fund flows (e.g., Nepal’s Integrated Financial Management
System).
 Whistleblower Incentives: Reward citizens for reporting graft in
school projects.

c. Public-Private Partnerships (PPPs):

 Adopt "School Chains": Partner with private operators (e.g.,

Nepal’s RUWON model) to manage rural schools, leveraging private
efficiency while retaining equity.
  Conditional Subsidies: Tie government grants to student
retention and learning outcomes.

d. Conditional Cash Transfers (CCTs):

 Link Payments to Enrollment: Provide stipends to low-income

families if children attend school regularly (e.g., Brazil’s Bolsa
Família).
 Gender Incentives: Offer higher stipends for girls to address
Nepal’s gender gap in education.

e. Decentralized Decision-Making:

 Empower local governments (per Nepal’s federal structure) to tailor

solutions, e.g.,
o Community Oversight: Village councils audit school
budgets.
o Mobile Schools: For nomadic communities in Himalayan
regions.

3. Conclusion

While first-best solutions (eliminating free riding and rent-seeking) are

impractical, Nepal can adopt second-best strategies that blend
accountability, community engagement, and technology. For instance,
combining CCTs with digital fund tracking could improve access while
curbing corruption. These steps align with Nepal’s SDG 4 commitments
and federal governance reforms, ensuring equitable, quality education
despite systemic challenges.

Key Takeaways:

 Theory Application: Links free riding and rent-seeking to Nepal’s

education crisis.
 Pragmatic Solutions: Balances idealism with actionable, context-
specific policies.
 Global-Local Synthesis: Adapts international models (e.g., Bolsa
Família) to Nepal’s needs.
Comparison of Cournot, Bertrand, and Stackelberg Models in
Nepal’s Telecom Sector

1. Model Comparisons

Cournot Model
 Assumptions:
o Firms compete on quantity (e.g., network capacity, service
offerings).

o Homogeneous products and simultaneous decision-making.

 Outcomes:
o Nash equilibrium where neither firm benefits from unilaterally
changing output.

o Prices are higher than marginal cost but lower than monopoly
levels.

 Example in Nepal:
o Nepal Telecom (NTC) and Ncell might determine
investments in infrastructure (e.g., 4G towers), indirectly
setting service quantities. Their combined capacity influences
market prices.

Bertrand Model
 Assumptions:
o Firms compete on price (e.g., call/data rates).

o Homogeneous products and perfect price transparency.

 Outcomes:
o Price wars drive profits to zero unless products are
differentiated.

 Example in Nepal:
o Price competition for prepaid plans could lead to lower tariffs.
However, differentiation (e.g., NTC’s rural coverage vs. Ncell’s
urban speed) mitigates a race to the bottom.

Stackelberg Model
 Assumptions:
o Leader-Follower dynamics (sequential moves).
 o Perfect information for the follower.

 Outcomes:
o Leader gains first-mover advantage, securing higher
market share and profits.

 Example in Nepal:
o NTC, as the state-owned incumbent, acted as a leader by
rolling out 4G first. Ncell later followed, adjusting its strategy
(e.g., targeting urban areas).

2. Real-World Relevance in Nepal’s Telecom Sector

 Cournot in Practice:
o Firms compete on network expansion (e.g., NTC’s rural towers
vs. Ncell’s urban investments). Total infrastructure capacity
affects service quality and pricing.

 Bertrand in Practice:
o Price wars for data bundles (e.g., Ncell’s “Super Data Pack” vs.
NTC’s “Data Offer”). Differentiation (network reliability,
customer service) prevents zero profits.

 Stackelberg in Practice:
o NTC’s early dominance in fixed-line and broadband set the
stage for market standards. Ncell entered later, focusing on
mobile innovation.

3. Challenges and Nuances

1. Product Differentiation:
o Telecom services are heterogeneous (coverage, speed,
bundled services), weakening Bertrand’s homogeneity
assumption.

2. Regulatory Influence:
o Nepal’s Telecommunications Authority regulates tariffs,
limiting pure price competition (Bertrand).

3. Dynamic Strategies:
 o Firms blend Cournot (capacity) and Bertrand (pricing) tactics.
For example, NTC’s rural infrastructure (Cournot) coexists with
urban price discounts (Bertrand).

4. Conclusion

 Cournot explains capacity-based competition (e.g., infrastructure

investments).

 Bertrand highlights price rivalry but is tempered by differentiation.

 Stackelberg reflects NTC’s historical leadership and Ncell’s

adaptive strategies.

 Nepal’s Telecom Dynamics: A hybrid model prevails, shaped by

regulation, differentiation, and sequential market entry. While
theoretical models simplify strategies, real-world complexity
demands flexible, multi-faceted approaches.

Example: NTC’s nationwide fiber rollout (Stackelberg leadership) forced

Ncell to innovate in mobile data (Cournot quantity competition), while
both avoid price wars through service differentiation (Bertrand with
heterogeneity).

Key Takeaway: Nepal’s telecom sector embodies elements of all three

models, demonstrating the interplay of quantity, price, and sequential
strategies in oligopolistic markets.

4. Input Markets:
o Nepal’s agriculture relies on seasonal migrant workers.
1. Analyze this labor market
using monopsony and bilateral
monopoly frameworks.
2. How can unions or government intervention improve
workers’ welfare?
1. Analysis of Labor Market Using Monopsony and Bilateral
Monopoly Frameworks

a. Monopsony Framework:

 Definition: A monopsony exists when a single buyer (employer)

dominates the labor market, giving them power to set wages below
competitive levels.

 Nepal’s Context:
o Seasonal migrant workers (e.g., from hills to Terai plains)
often depend on a few large landowners or contractors for
employment.

o Wage Suppression: Employers exploit labor surplus to pay

wages W<MRP (Marginal Revenue Product).

o Example: In Nepal’s sugarcane farms, workers earn as little

as NPR 400/day despite contributing NPR 800/day in value.

b. Bilateral Monopoly Framework:

 Definition: A bilateral monopoly involves one powerful employer

and one unified seller of labor (e.g., a union).

 Nepal’s Context:
o Unions are rare among seasonal workers, but collective
bargaining could balance power.

o Negotiation Outcome: Wages settle between the employer’s

monopsony rate and the union’s demanded rate.

o Example: Tea plantation workers in Ilam formed cooperatives

to negotiate better wages, raising pay by 25%.

2. Implications for Workers’ Welfare

 Monopsony: Low wages, poor working conditions, and no job
security.

 Bilateral Monopoly: Potential for fairer wages but requires strong

unions, which are scarce in Nepal’s informal agricultural sector.
3. Solutions to Improve Welfare

a. Unionization and Collective Action:

 Strengthen Labor Unions:

o Organize seasonal workers into region-specific unions (e.g., All
Nepal Peasants’ Federation).

o Example: Kerala’s Kudumbashree model empowered women

workers through collective farming.

 Mobile Union Networks: Use SMS/WhatsApp to coordinate

transient workers during migration seasons.

b. Government Intervention:

 Enforce Minimum Wage Laws:

o Set and monitor sector-specific wages (e.g., NPR 600/day for
farm labor).

o Example: Nepal’s Labour Act 2017 mandates minimum wages,

but enforcement is weak in rural areas.

 Labor Rights Education: Train workers on legal entitlements via

community radios or local NGOs.

 Public Employment Programs:

o Expand initiatives like Prime Minister’s Employment
Program to reduce dependency on exploitative employers.

c. Decentralized Labor Markets:

 Digital Job Platforms: Create apps (e.g., Sunaulo Haat)

connecting workers to multiple employers, breaking monopsony
power.

 Cooperatives: Promote worker-owned farming cooperatives

(e.g., Jumla Apple Farmers’ Cooperative) to bypass middlemen.

d. Address Rent-Seeking:

 Penalize Exploitative Contractors: Impose fines for wage theft or

unsafe conditions.
  Transparent Contract Farming: Regulate agreements between
farmers and corporate buyers to ensure fair profit-sharing.

4. Challenges
 Informality: 68% of Nepal’s workforce is informal, complicating
unionization.

 Seasonal Migration: Workers’ transient nature hinders collective

action.

 Corruption: Local officials often side with powerful employers.

5. Conclusion

While monopsony power perpetuates exploitation in Nepal’s agricultural

sector, a hybrid approach—combining unionization, tech-driven labor
markets, and stringent government oversight—can shift power dynamics.
For instance, pairing mobile unions with digital job platforms would
empower workers while ensuring compliance with wage laws. This aligns
with Nepal’s constitutional goal of “equitable labor relations” and SDG 8
(Decent Work).

Example: In Chitwan, tomato farmers using a cooperative model

increased incomes by 40%, demonstrating the viability of collective action
even in informal settings.

Unit 1: Welfare Economics

1. What is Pareto Optimality? Give an example.

o Answer: A state where no one can be made better off without
making someone worse off.
o Example: Two students trading books to mutual benefit
without harming others.
2. State Arrow’s Impossibility Theorem.
o Answer: No social welfare function can satisfy universality,
non-dictatorship, independence of irrelevant alternatives, and
Pareto efficiency simultaneously.
3. Compare Kaldor-Hicks and Pareto Criteria.
 o Answer: Pareto requires no losers; Kaldor-Hicks allows
hypothetical compensation.

Unit 2: General Equilibrium

4. Explain the Walrasian Auctioneer’s role.

o Answer: Hypothetical entity adjusting prices
via tâtonnement until all markets clear.
5. Define Pareto Efficiency in the Edgeworth Box.
o Answer: Occurs where indifference curves are tangent (MRS₁
= MRS₂).

Unit 3: Market Failure & Public Goods

6. Why are public goods underprovided?

o Answer: Non-excludability → free riding; non-rivalry → no
profit incentive for private firms.
7. Compare Pigovian Tax and Coasian Solutions.
o Answer:
 Pigovian: Government taxes externality (e.g., carbon
tax).
 Coasian: Private bargaining with property rights (e.g.,
farmers suing polluters).
8. What is Rent-Seeking? Give a Nepal example.
o Answer: Using resources to gain economic rents (e.g.,
lobbying for licenses).
o Example: Corruption in Nepal’s infrastructure contracts.

Unit 4: Input Markets

9. How does monopsony lower wages?

o Answer: Single buyer (employer) sets wages where MCL =
MRP, below competitive levels.
10. Define Quasi-Rent vs. Economic Rent.
o Answer:
  Quasi-rent: Short-term surplus from fixed factors (e.g.,
machinery).
 Economic rent: Long-term surplus (e.g., land).

Unit 5: Duopoly & Oligopoly

11. Solve Cournot Duopoly (P = 120 – Q, MC = 30).

o Answer: Each firm produces 30 units, price = 60, profit = 900
per firm.
12. Why do cartels collapse?
o Answer: Members cheat to increase output (e.g., OPEC oil
quota violations).
13. Explain the Kinked Demand Curve.
o Answer: Firms assume rivals match price cuts but ignore
hikes → price rigidity.

Nepal Context (Critical Questions)

14. Why does Coasian bargaining fail in Nepal’s pollution

control?
o Answer: High transaction costs, weak property rights, and
asymmetric information (e.g., Bagmati River pollution).
15. How is Nepal’s telecom sector an oligopoly?
o Answer: Dominated by NTC (Stackelberg leader) and Ncell
(follower) with Cournot-like infrastructure competition.

Key Takeaways:

 Pareto, Arrow, Kaldor-Hicks dominate Welfare Economics.

 Market Failure: Focus on public goods, externalities, and rent-
seeking.
 Oligopoly: Master Cournot, cartels, and kinked demand.
 Input Markets: Monopsony vs. competitive wage determination.

Unit 3: Market Failure and Public Goods

Possible Questions
Short Answer (5 marks):

1. Define "quasi-public goods" and give two examples.

2. How does adverse selection differ from moral hazard in insurance
markets?
3. What is the "Tragedy of the Commons"? Provide a real-world
example.

Analytical/Essay (10 marks):

4. "Public goods are non-excludable and non-rivalrous, but their provision
often requires government intervention." Explain this statement with
reference to free riding and Pareto efficiency.
5. Compare Pigovian taxes and subsidies as tools to correct negative
and positive externalities. Use diagrams to illustrate their effects.
6. Why do Coasian solutions to externalities often fail in developing
countries like Nepal? Discuss transaction costs and property rights issues.

Case Study (10 marks):

7. Nepal’s government struggles to regulate pollution in the Bagmati
River. Analyze this issue using the concepts of externalities and market
failure. Propose a policy solution (Pigovian or Coasian).

Unit 4: Input Markets

Possible Questions
Short Answer (5 marks):

1. Define "monopsony" and explain how it affects wage determination.

2. What is "economic rent"? How does it differ from "quasi-rent"?
3. Why do labor unions act as wage monopolists?

Numerical (10 marks):

4. A firm in a perfectly competitive labor market has a production
function Q=10L−0.5L2Q=10L−0.5L2. If the price of the product
is 5andthewagerateis5andthewagerateis20, calculate the profit-
maximizing level of labor (LL).

Analytical/Essay (10 marks):

5. Derive the industry demand curve for labor under perfect
competition. How does it change if firms have monopsony power?
6. Explain the concept of bilateral monopoly in labor markets. Use a
diagram to show how wage rates are determined in such a scenario.
7. "Rent-seeking behavior reduces societal welfare." Critically evaluate
this statement with examples from Nepal’s agricultural or industrial
sectors.

Unit 5: Duopoly and Oligopoly Markets

Possible Questions
Numerical (10 marks):

1. In a Cournot duopoly, two firms face market

demand P=100−QP=100−Q. Their marginal costs are MC1=20MC1
=20 and MC2=25MC2=25. Calculate each firm’s equilibrium output,
price, and profit.

Short Answer (5 marks):

2. What is the "kinked demand curve"? Why does it lead to price rigidity?
3. How does product differentiation affect competition in Chamberlin’s
oligopoly model?

Analytical/Essay (10 marks):

4. Compare Cournot and Stackelberg models in terms of assumptions,
outcomes, and strategic behavior. Which model better reflects real-world
oligopolies?
5. Analyze the challenges OPEC faces in maintaining a joint profit-
maximizing cartel. Why do cartels often collapse?
6. Explain the dominant firm price leadership model. How does the
dominant firm set prices, and what are the risks of this strategy?

Mixed/Long Questions (15–20 marks):

1. Case Study: Nepal’s telecommunications sector is dominated by a

few firms (e.g., NTC, Ncell).
o Analyze the market structure using oligopoly models (e.g.,
Cournot, price leadership).
o Discuss how government regulation addresses potential
market failures in this sector.
2. "Market failures justify government intervention, but imperfect
information limits its effectiveness." Critically discuss this statement
in the context of Nepal’s public health or education sectors.
 3. Numerical + Theory:
o Solve a Stackelberg duopoly problem where the leader has
a cost advantage.
o Explain how first-mover advantage impacts market
outcomes compared to Cournot.

5 × 5 = 25 marks)
Answer any FIVE questions:

1. Define Pareto optimality and provide an example of a Pareto

improvement.

2. What is the Scitovsky Paradox? How does it challenge the Kaldor-

Hicks criterion?
3. Explain the role of the Walrasian auctioneer in general
equilibrium theory.
4. How does asymmetric information lead to market failure in the
health insurance market?
5. Define quasi-rent and distinguish it from economic rent.
6. Why does the kinked demand curve model predict price rigidity in
oligopolies?
7. State Arrow’s Impossibility Theorem and its key assumption.

Group B: Analytical/Numerical Questions

(5 × 10 = 50 marks)
Answer any FIVE questions:

3. Welfare Economics:
o Suppose a policy increases Person A’s utility by 20 units but
decreases Person B’s utility by 15 units. Can this policy be
justified under the Benthamite and Rawlsian criteria?
4. General Equilibrium:
o Use an Edgeworth Box to show how trade between two
individuals (with initial endowments of goods X and Y) leads to
a Pareto-efficient equilibrium.
5. Market Failure:
 o Compare Pigovian taxes and Coasian bargaining as
solutions to industrial pollution. Why might Coasian solutions
fail in Nepal?
6. Input Markets:
o A monopsonist faces a labor supply curve W=10+2LW=10+2L.
If the MRP of labor is 60−L60−L, calculate the profit-
maximizing wage and employment level.
7. Oligopoly:
o Solve a Cournot duopoly where market demand
is P=120−QP=120−Q, and both firms have MC=30MC=30. Find
equilibrium output, price, and profits.
8. General Equilibrium:
o Explain the excess demand function approach to proving
the existence of equilibrium in a Walrasian system.
9. Welfare Economics:
o Critically evaluate the Bergson-Samuelson Social Welfare
Function. What are its limitations?

Group C: Essay/Case Study Questions

(2 × 15 = 30 marks)
Answer any TWO questions:

1. Case Study:
o Nepal’s government plans to build a hydropower plant that
displaces local communities.
 Analyze the project using Pareto
optimality and Kaldor-Hicks compensation.
 Suggest policies to address welfare losses.
2. Market Failure & Public Goods:
o "Nepal’s public education system suffers from free riding and
underfunding."
 Explain this using public goods theory and rent-
seeking behavior.
 Propose a second-best solution for improving access
and quality.
3. Oligopoly:
o Compare the Cournot, Bertrand, and Stackelberg models
in terms of assumptions, outcomes, and real-world relevance.
Use examples from Nepal’s telecom sector.
4. Input Markets:
o Nepal’s agriculture relies on seasonal migrant workers.
 Analyze this labor market
using monopsony and bilateral
monopoly frameworks.
 How can unions or government intervention improve
workers’ welfare?