Exam 17: Externalities and Public Goods

(Figure: Externalities) Answer the following questions. a. Is there a positive or negative externality in the market? b. What are the market equilibrium price and quantity? c. What are the socially optimal equilibrium price and quantity? d. What is the size of the external marginal benefit or external marginal cost?

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 total cost of cleanup, after the exchange of permits, is $____.

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. Determine the maximum permit price (whole dollar amount), the number of permits traded, and the revenue and costs of trading permits if the government employs a tradable permit scheme in which it gives the same number of permits to each manufacturer at no cost.

(Table: Whole Paycheck Externalities) A supermarket chain, Whole Paycheck, is planning on opening a store near a residential neighborhood. The neighbors are opposed to the construction, since they believe increased traffic and other nuisances will decrease their home values. According to the Coase theorem, what is the optimal store size?

Consider the vaccine for human papillomavirus (HPV), a sexually transmitted disease that causes cervical cancer and genital warts. a. Why might an HPV vaccine generate positive externalities? b. Draw a graph of the HPV vaccine market, illustrating the demand curve, social demand curve, and supply curve. c. On your graph, indicate the perfectly competitive output of vaccines and the socially optimal output.

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. The government wants to correct the negative externality associated with remote-control drone flights by taxing operators $20 per flight. What deadweight loss is associated with unrestricted remote-control drone flights if the proposed tax accurately reflects their marginal external costs?

(Table: Benefits and Costs of Lawn Mowing) Answer the following question. Besides carrying external marginal costs, suppose that lawn cutting also generates an external marginal benefit of $10. Given this, the socially optimal number of times that a lawn should be mowed in a month is ____.

Which of the following statements is (are) TRUE? I. In the face of a positive externality, a perfectly competitive market produces less than the socially optimal quantity of output. II. If vaccinations generate an external marginal benefit, their marginal social benefit will always exceed their private marginal benefit. III. In unregulated markets, the presence of negative externalities-but not positive externalities-causes deadweight losses.

(Figure: Perfect Competition I) Under perfect competition, the deadweight loss is given by area:

Suppose the market for dry cleaning has an inverse demand of P = 10 - 0.15Q and an inverse supply curve (MC) of P = 0.05Q, 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 $1. If the government tries to correct the negative externality by placing a $1 tax on each laundered piece of clothing, buyers will pay _____ and sellers will receive _____, net of the tax.

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, the maximum amount that any of the firms would be willing to pay would be up to $_____.

For the following situations, use the Coase theorem to explain how a socially efficient solution may arise. a. An adult bookstore, with a legal right to operate, causes psychic discomfort of $250,000 for a nearby church. The adult bookstore owner values his business at $200,000. b. A church has purchased a building with storefronts leased to several businesses. The church must decide whether to allow the businesses to renew their leases. One of the businesses is an adult bookstore whose owner values the location at $450,000. The continued operation of the adult bookstore would generate $250,000 of psychic discomfort to the church.

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. Based on the government's incorrect estimate of marginal abatement costs, the government thinks the socially optimal level of pollution is ____.

The inverse demand for energy-efficient refrigerators is P = 2,000 - 10Q, where Q measures refrigerators per month. The inverse supply of energy-efficient refrigerators is P = 10Q. Suppose the use of an energy-efficient refrigerator reduces carbon dioxide emissions, generating an external marginal benefit of $100. The socially optimal quantity of energy-efficient refrigerators is ____.