Exam 10: Externalities- When the Price Is Not Right

Use the following to answer questions: Figure: External Benefit -(Figure: External Benefit) Refer to the figure. Shingles is a painful and blistering skin rash that generally affects older adults. The shingles virus is transmitted by those with an active outbreak, and it can cause chicken pox in people who never had it. The 6^th unit has a social value of ______ and a private cost of ______.

Which of the following statements is TRUE? I. If an activity creates an external cost of $15, the government should subsidize the activity by $15. II. Social surplus is maximized when the private marginal benefit equals the social cost. III. External costs result in markets producing too much output. IV. Someone pays external costs other than the producer or consumer.

Suppose there will be global catastrophe unless we hold total carbon dioxide emissions at or below 35 million tons per year. As a result, each person on Earth is allocated 10 pounds of untradable emissions permits per year. Why would this be an inefficient solution?

(Table: Costs of Antibiotics) Refer to the table. The deadweight loss in the market could be eliminated if the government:

Use the following to answer questions: Figure: External Cost 1 -(Figure: External Cost 1) Refer to the figure. Paper mills are notorious for emitting horrible smells that impose external costs on those living around the mills. According to the figure, what is the market price and quantity of paper?

Use the following to answer questions: Figure: Market with External Cost -(Figure: Market with External Cost) Suppose the figure displays the demand and supply curves for dry cleaning, a service that creates pollution. The external cost of dry cleaning is:

In a market with external costs, the market price is:

When law-abiding citizens carry concealed weapons, they are better able to defend themselves against criminal attack. This is the ______ of concealed carry. When law-abiding citizens carry concealed weapons, criminals are also less likely to attack all citizens because they cannot tell who is carrying a gun. This is the ______ of concealed carry.

Use the following to answer questions: Figure: Market for Vaccines -In Market X, the external benefit of consumption is $5. In Market Y, the external cost of consumption is $10. Efficiency in both markets could be achieved by:

Which policy does the economics of externalities suggest would encourage an efficient quantity in the corresponding market?

Which of these statements is TRUE in the case of externalities? I. In the case of externalities, prices do not reflect the true cost or benefit of the product. II. In the case of externalities, prices sometimes send the wrong signals about a market. III. Externalities discourage new producers from entering the industry since the price always remains about the efficient price.

Suppose there will be global catastrophe unless we hold total carbon dioxide emissions at or below 35 million tons per year. As a result, 35 million tons of emissions permits are auctioned off and the proceeds distributed equally between everybody on Earth. Is this better, worse, or basically the same as allocating to each of 7 billion people on Earth 10 pounds of untradable emissions permits per year?

Government solutions to externality problems include:

Markets with external costs are inefficient, whereas markets with external benefits are efficient.

Nobel Prize-winning economist James Meade argued that the market for honey was inefficient because pollination is a(n):

The Coase theorem uses a ______ solution for a class of externality problems.

Tradable allowances:

Conditions for the Coase theorem are typically met, and thus markets alone can solve most externality problems.