1. Briefly discuss some ways the government could ensure a market with a positive externality could encourage production of the socially optimal output
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1. Briefly discuss some ways the government could ensure a market with a positive externality could encourage production of the socially optimal output.
2. Do you believe higher education provides our economy with a positive externality? Why or why not?
Do you believe the steps that the federal government takes to encourage the socially optimal amount of higher education be produced/consumed is appropriate? Too much? Too little? Why? (Use appropriate economic theory to support your position.)
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- 3. For each of the following goods or services, would you classify it as a public good, a local public or club good or congestible good, or a private good (with or without externalities)? Explain your choice. Could some of them fall in one or another category depending on the assignment of property rights? • the Supreme Court • a local magistrate’s court • the interstate highway system • college education • a beach • the stars at night viewed from outdoors • the stars viewed at a planetarium6. Climate change and externalities. How is the issue of climate change related to the concept of externalities? What is the externality? What are the relevant markets? b. Provide an example of a market that features this externality. Assuming there is no intervention to correct for the externality, compare the market allocation to the efficient allocation. Does the market produce too much? Too little? Is the market outcome efficient? а. c. What is the relationship between the marginal private cost of production in this market and the marginal social cost? Explain. d. Suppose you wanted to come up with an estimate of the magnitude of the marginal external cost (in dollars). What would this number represent? What sort of information would you need to determine this number?MSC 10 4 MSB 100 200 300 400 500 600 Quantity (dozens of doughnuts per day) 18) The above figure shows the marginal social benefit and marginal social cost curves of doughnuts in the nation of Kaffenia. There is no external benefit. What is the marginal benefit to the citizen of Kaffenia who consumes the 100th dozen doughnuts each day? [5 POINTS] A) $10.00 per dozen B) $8.00 per dozen C) $6.00 per dozen D) $4.00 per dozen 19) The above figure shows the marginal social benefit and marginal social cost curves of doughnuts in the nation of Kaffenia. What is the marginal social cost to the economy of Kaffenia of producing the 100th dozen doughnuts each day? [4 POINTS] A) $10.00 per dozen B) $8.00 per dozen C) $6.00 per dozen D) $4.00 per dozen Marginal cost and marginal benefit (dollars per dozen)
- 4. Externalities - Definition and examples An externality arises when a firm or person engages in an activity that affects the well-being of a third party, yet neither pays nor receives any compensation for that effect. If the impact on the third party is beneficial, it is called a externality. The following graph shows the demand and supply curves for a good with this type of externality. The dashed drop lines on the graph reflect the market equilibrium price and quantity for this good. Shift one of the curves to reflect the presence of the externality. If there are external costs of production, then you should shift the supply curve to reflect the social costs of producing the good; similarly, if there are external benefits from production, then you should shift the demand curve to reflect the social benefits from consuming the good. PRICE (Dollars per unit) QUANTITY (Units) Supply Demand O Demand -- Supply ? With this type of externality, in the absence of government intervention,…4. Externalities - Definition and examples An externality arises when a firm or person engages in an activity that affects the well-being of a third party, yet neither pays nor receives any compensation for that effect. If the impact on the third party is detrimental, it is called a externality. The following graph shows the demand and supply curves for a good with this type of externality. The dashed drop lines on the graph reflect the market equilibrium price and quantity for this good. Shift one of the curves to reflect the presence of the externality. If there are external costs of production, then you should shift the supply curve to reflect the social costs of producing the good; similarly, if there are external benefits from production, then you should shift the demand curve to reflect the social benefits from consuming the good. PRICE (Dollars per unit) QUANTITY (Units) Supply Demand Demand Supply With this type of externality, in the absence of government intervention, the…QUESTION 9 Which of the following can be concluded from the information presented in the graph? PRICE OF EDUCATION Il only only III and II I OI and III Marginal Social Cost 0200 Marginal Social Benefit Marginal Private Benefit 1. Consumption of education has a positive externality. II. Quantity of education consumed in a private market is less than the socially optimal amount. III. Producers of education should be taxed. O I only QUANTITY OF EDUCATION
- 4. Hydraulic Fracking is the process of drilling and injecting fluid into the ground at a high pressure in order to fracture shale rocks to release natural gas inside to be sold as an energy source. Up to 600 chemicals are used in fracking fluid, including known carcinogens and toxins. This is an example of a... a. Negative production externality b. Negative consumption externality C. Positive production externality d. Positive consumption externality2. Efficiency in the presence of externalities Fireworks impose many external costs on society: noise pollution, pets and children that become frightened, accidents leading to property damage and bodily harm, and so on. Therefore, the market equilibrium quantity of fireworks does not equal the socially optimal quantity. The following graph plots the demand for fireworks (their private value), the supply of fireworks (the private cost of producing them), and the social cost of fireworks, including both the private cost and external costs. Use the black point (plus symbol) to indicate the market equilibrium quantity. Next, use the purple point (diamond symbol) to indicate the socially optimal quantity. PRICE OF FIREWORKS Social Cost Supply (Private Cost) Demand (Private Value) QUANTITY OF FIREWORKS + Market Equilibrium Socially Optimal Level5. The Role of Government: Quota - Quantity Regulation Smoking imposes health risks to others and generates negative demand-side externalities. The following diagram describes the market for cigarettes. (a) In the diagram, identify the lines that express the Marginal Social Cost, Marginal Private Cost, Marginal Private Benefit, and Marginal Social Benefit; briefly explain. [ Price per Pack (P) X Packs of cigarettes (Q) b. Suppose that the government is to impose a quota on cigarette production to correct the externality. Using the diagram, indicate the quota, consumer surplus and producer surplus from the quota regulation. Price per Pack (P) Packs of cigarettes (Q) (c) Please discuss different impacts of quota regulation and excise tax to correct the externality of smoking. Be sure to discuss their effects on consumer surplus, producer surplus, and government revenue. Which type of regulation will the producers prefer, quota or exercise tax? Why?
- 19. This next question will require you to draw on what you have learned about supply and demand and taxes. A study finds that leaf blowers make too much noise; therefore it is considered a externality, so the government imposes a $10 tax on the sale of every unit to correct for the social cost of the noise pollution. The tax completely internalizes the externality. Before the corrective tax, Leaves are Us Manufacturing regularly sold blowers for $100 and market quantity is 300. Draw the supply and demand curve for leaf blowers. Label the axes, the curves, market price, market quantity, and equilibrium. Which curve represents private or internal costs? represents external and private costs? This is also known as What is the private market price? What is the private market quantity? Which curve costs. After the tax is in place, the consumer price of leaf blowers rises to $105. With this change in price, the number of leaf blowers will (decrease/increase). Why will this happen?3. An externality is a consequence of an economic activity experienced by unrelated third parties; it can be either positive or negative. Evaluate the positive externalities and the negative externalities through examples from the real life2. What kind of good is it? Determine whether each of the following goods is a private good, a public good, a common resource, or a club good. Private Good Public Good Club Good Common Resource A large, beautiful fountain in a park A new BMW that you use to drive your friends around town A free-weight station in a fitness room that is open to the public
