Exam 18: Externalities, Open-Access, and Public Goods

The U.S. Federal government limits the ability for private firms to harvest timber on much government land. This, it is argued, increases the amount of fuel for wildfires which often burn out of control and cost money and manpower to control.

In general, an externality is created when

Which of the following policies addresses the problem posed by positive externalities?

Suppose three neighbors must vote on the installation of a traffic light that costs $210. The cost of the light will shared by all three. Voter A values the light at $50; voter B values the light at $50; and voter C (who drives the most)values the light at $200. If the voting rule is that the majority wins, does the light get purchased? Is it efficient to purchase the light?

-The above figure shows the payoff matrix for two firms. A chemical firm must choose between a low level of production which yields one ton of pollution into a nearby lake and a high level of production which yields two tons of pollution into the nearby lake. A private beach on the lake must decide whether to operate or not. Increased pollution reduces the number of people who wish to visit the beach. Joint profits are maximized when

Because a monopoly will produce less of a good than a competitive market will, welfare is always greater under monopoly than under competition in the presence of a negative externality.

-The above figure shows the market for steel ingots. If the market is competitive, then

-The above figure shows the market for steel ingots. If the market is competitive, then to achieve the socially optimal level of pollution, the government can

-The above figure shows the payoff matrix for two firms. A chemical firm must choose between a low level of production which yields one ton of pollution into a nearby lake and a high level of production which yields two tons of pollution into the nearby lake. A private beach on the lake must decide whether to operate or not. Increased pollution reduces the number of people who wish to visit the beach. Determine the Nash equilibrium without property rights.

When negative externalities from production exist, the deadweight loss from a competitive market may be larger than with a monopoly.

The Commons Problem could be addressed by

If the median voter voted against a project, we can infer that

-The above figure shows the marginal benefit to a firm of polluting in the local river while producing its output, and the marginal cost to the surrounding neighbors. The marginal cost of production is zero for the firm. If the firm owns the river and there is just one neighbor affected by the pollution, how much pollution is likely to occur?

A common resource is best described as a resource where

Production of a good produces pollution that is very damaging with each additional unit. A monopoly facing a very elastic demand curve will most likely produce

-The above figure shows the payoff matrix for two firms. A chemical firm must choose between a low level of production which yields one ton of pollution into a nearby lake and a high level of production which yields two tons of pollution into the nearby lake. A private beach on the lake must decide whether to operate or not. Increased pollution reduces the number of people who wish to visit the beach. As long as someone owns the lake and the two parties can negotiate, then

When majority rule voting is used to determine whether to purchase a public good,

The efficient quantity of a public good occurs when the marginal cost of providing that good equals the sum of the marginal benefits to all individuals.

You are having a party and one of your guests lights up a cigar without asking. Explain why this creates an externality.

-The above figure shows the payoff matrix for two firms. A chemical firm must choose between a low level of production which yields one ton of pollution into a nearby lake and a high level of production which yields two tons of pollution into the nearby lake. A private beach on the lake must decide whether to operate or not. Increased pollution reduces the number of people who wish to visit the beach. If nobody owns the lake, then