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 _____.

(Table: Good Categories) Tick off the appropriate categories for each good.

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 by issuing tradable pollution permits to each firm. What is the total cost (TAC_S + TAC_M) of reducing emissions by 1,000 tons?

The notion that market participants can negotiate an efficient market outcome, assuming negotiating is costless, is known as the:

Suppose the demand curve for steel is Q = 100 - P, where P is the price per unit of steel and Q measures millions of units of steel. The private marginal cost of producing steel is MC = 5Q + 40, while the external marginal cost of producing steel is $12. In a perfectly competitive steel industry, the deadweight loss is:

Rosa and Tomas are neighbors. Rosa loves to barbeque, but Tomas is allergic to barbecue smoke. They have been neighbors for years and know each other well, often chatting across their picket fence. Tomas values clean air at $100. If Rosa has the right to barbecue, predict the outcome of the situation using the Coase theorem.

If consuming a good with a positive externality, a person will likely consider only the _____ marginal benefits of consumption, which causes _____ consumption than is socially optimal.

(Figure 17.13) According to the graph, MCP is the marginal cost of pollution, MAC is the marginal abatement cost, and the government's erroneous estimate of the marginal abatement cost is estimated MAC. Answer the following questions. a. What is the socially optimal level of pollution? b. If the government uses a quantity restriction, how much pollution will be emitted? c. If the government uses a price-based restriction, how much pollution will be emitted? d. What is the deadweight loss from the quantity restriction and from the price-based restriction?

Recreation centers offer a place for young people to play sports and engage in other activities at a marginal cost of MC = 0.25Q. The inverse demand curve for recreation centers is given by P = 10 - 0.25Q, where P is the price of entry and Q measures hundreds of entrants. Recreation centers generate positive externalities because they help get young people off the street and engaged in productive activities. The external marginal benefits are EMB = 1 + 0.06Q. The socially optimal number of entrants is ____ entrants.

(Table: Public Goods I) What is the efficient quantity of the public good?

Recreation centers offer a place for young people to play sports and do other activities at a marginal cost of MC = 0.25Q. The inverse demand curve for recreation centers is given by P = 10 - 0.25Q, where P is the price of entry and Q measures hundreds of entrants. Recreation centers generate positive externalities because they help get young people off the street and engaged in productive activities. The external marginal benefits are EMB = 1 + 0.06Q. a. Without government intervention, how many people use the recreation centers? b. Derive the social demand curve for recreation centers. c. What is the socially optimal number of entrants? d. Explain how the government could use a price-based intervention to achieve the socially optimal number of entrants.

The _____ problem occurs when consumers want to freely consume a public good that others have provided.

Mushroom farms emit unpleasant odors that affect third parties. The marginal cost of the odors is MC = 4Q, where Q is the quantity of fumes emitted. Mushroom farmers can reduce odors by using various techniques and technologies; the marginal abatement cost is MAC = 1,200 - 36Q. The efficient quantity of odor emission is ____ fumes.

The market for toilet paper is characterized by the following inverse demand and supply equations: P = 100 - Q P = MC = 2Q - 197.3 Where P is the price per roll of toilet paper and Q measures millions of rolls of toilet paper. The external marginal cost is 30 cents for each roll of toilet paper produced. The socially optimal price of toilet paper is _____ cents higher than the price under perfect competition.

(Figure: Cost of Pollution) Which of the following statements is TRUE?

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 government regulators require each refinery to remove 150 units of methane. The total cost of removing these 150 units for the Park refinery is $____.

(Figure: Benefits of Asparagus) Suppose that eating asparagus reduces the incidence of contagious disease. The external marginal benefit of asparagus is $3. To achieve the socially optimal quantity of asparagus, the government should:

Consider three consumers of a public good with the following marginal benefit of consumption: Consumer 1: MB₁ = 5 - 2Q Consumer 2: MB₂ = 4 - Q Consumer 3: MB₃ = 3 - Q a. If the marginal cost of producing the public good is MC = 8Q, what is the efficient quantity of it? b. If the marginal cost of producing the public good is constant at $4, what is the efficient quantity of it?

(Table: Neighborhood Playground) The willingness to pay for a new neighborhood playground is shown in the table. The marginal cost of providing the playground is MC = 300 + 0.5Q, where Q is square feet. What is the efficient quantity of the good?

The following companies all manufacture widgets and dump tons of glop into the air. The government wants to halve total pollution but does not know how much it will cost each company. If the government employs a tradable permit scheme in which it gives the same number of permits to each manufacturer at no cost, the number of permits traded would be ____.