Exam 17: Externalities and Public Goods

Assume the social marginal benefit of remote-control drone flights is given by SMB = 200 - 2Q and the marginal cost is given by MC = 3Q + 50. Assuming there are no external benefits and in a perfectly competitive environment, the equilibrium price per flight would be $_____ and the equilibrium number of flights would be _____.

(Figure: Efficient Quantities and Consumers) Suppose that the demand curves for two consumers of good X are presented in the graph. The marginal cost of producing good X is MC = $9. a. If good X is rival and excludable, what is its efficient quantity? b. If good X is nonrival and nonexcludable, what is its efficient quantity?

What is the nature of the positive externality associated with research and development (R&D)?

The marginal cost of pollution is MC = 2Q, while the marginal abatement cost is MAC = 12 - Q. Government regulators incorrectly estimate the marginal abatement cost at MAC_E = 9 - Q. The level of pollution, measured in tons of glop, is Q. a. Solve for the socially optimal level of pollution by using MAC. b. Based on the government's incorrect estimate of marginal abatement costs, what does the government think is the socially optimal level of pollution? c. If the government uses a quota to intervene in the market, how much pollution will be omitted? d. If the government taxes each ton of glop, how much pollution will be omitted? e. Does quantity restriction or the price-based intervention get us closer to the socially optimal output level?

Hamid and Lee are neighbors. Hamid has a barking dog that he keeps in his backyard for property protection; he values the dog at $600. Lee despises the constant barking, because it costs him $800 in lost sleep. Assume Hamid has a legal right to own a barking dog. Because Hamid speaks Farsi and Lee speaks Korean, they need an interpreter to handle negotiations regarding the dog. There ____ a Coase solution to this problem if the interpreter costs $250 and ____.

A small neighborhood is considering hiring a security firm to patrol the neighborhood. Ten families in the neighborhood would each get a marginal benefit of MB = 10 - h, where h is daily hours of patrol. The marginal cost of patrol is constant at $20 per hour. What is the socially optimal number of patrol hours?

The tragedy of the commons stems from a common resource that people can _____ acquire, the value of which _____ as more people use it.

(Figure: Market Efficiency) If the socially optimal quantity of the good is 200 pounds, there is a _____ externality, so the government should enact a _____ per pound to increase market efficiency.

The marginal cost of pollution is MC = 2Q, while the marginal abatement cost is MAC = 12 - Q. Government regulators incorrectly estimate the marginal abatement cost at MAC_E = 9 - Q. The level of pollution, measured in tons of glop, is Q. If the government taxes each ton of glop based on the incorrect estimate of the marginal abatement cost, ____ units of pollution will be omitted.

Suppose that, at the current level of pollution, the marginal abatement cost is $30,000 and the marginal cost of pollution is $80,000. This economy is producing:

Inverse demand for a product is given by P = 1,500 - 0.5Q_d, while inverse supply is given by P = 300 - Q. The product is generating external marginal benefits equal to $1,000 at every price level. Graph this information. Based on the information, does this product generate a negative or positive externality? Identify any deadweight loss.

Sweet Steel and Molten Metal produce sulfur dioxide emissions during production. The total abatement cost (TAC) and marginal abatement cost (MAC) for each company: Sweet Steel: TAC_S = 100,000 + 1e_S²; MAC_S = 2e_S Molten Metal: TAC_M = 100,000 + 1.5e_M²; MAC_M = 3e_M Where e_S and e_M represent tons of sulfur dioxide emissions eliminated by each company. Suppose the government wants to eliminate 1,000 tons of sulfur dioxide emissions, so it mandates that each firm cut its emissions by 500 tons. What is the total cost (TAC_S + TAC_M) of reducing emissions by 1,000 tons?

(Figure: Public Goods) The graph shows the marginal benefit curves for two consumers of a public good. a. Graph the total marginal benefit curve. b. What is the total marginal benefit of 4 units of a public good? c. What is the efficient quantity of the public good?

(Figure: External Marginal Cost I) The external marginal cost is:

Hamid and Lee are neighbors. Hamid has a barking dog that he keeps in his backyard for property protection; he values the dog at $600. Lee despises the constant barking, because it costs him $800 in lost sleep. Assume Hamid has a legal right to own a barking dog. Because Hamid speaks Farsi and Lee speaks Korean, they need an interpreter to handle negotiations regarding the dog. There ____ a Coase solution to this problem if the interpreter costs $70 and ____.

Minnesota has two oil refineries that emit methane gas. The Bend refinery emits 300 units of methane, and the Park refinery emits 900 units. Government regulators would like to reduce total methane emissions from 1,200 to 900 units. Bend's total abatement and marginal abatement costs are TC_B = 400Q_B + 4Q_B² and MAC_B = 400 + 8Q_B, where Q is units of methane. Park's total abatement cost and marginal abatement costs are TC_P = 40Q_P + 2Q_P² and MAC_P = 40 + 4Q_P. Suppose that the government regulators evenly split 900 methane pollution permits between the two refineries. The total cost of removing 300 units of methane, using a tradable permit system is $____.

Suppose the market for dry cleaning has an inverse demand of P = 12 - 0.10Q and an inverse supply curve (MC) of P = 0.10Q, where P is the price per article of clothing and Q is the quantity of clothing laundered. Suppose the external marginal cost of dry cleaning is 80 cents. To correct the market inefficiency, the government could set a quota on the number of laundered pieces of clothing equal to ____ articles of clothing.

(Table: Benefits and Costs of Lawn Mowing) Answer the following questions. a. How many times will a self-interested person cut her lawn during the month? b. What is the socially optimal number of times to mow the lawn? c. How might lawn cutting generate positive externalities? d. Besides carrying external marginal costs, suppose that lawn cutting also generates an external marginal benefit of $10. What now is the socially optimal number of times that a lawn should be cut?

Bumper-to-bumper traffic on free public roads, a(n) _____ good, is an example of the _____.

(Table: Pollution from Firms) Suppose that each firm is emitting 10 units of pollution, for a total of 20 units. The government would like to decrease total pollution to 10 units by giving each firm five tradable pollution permits. Under the tradable permit system, Firm B will emit ____ units of pollution.