Exam 9: Externalities and Public Goods

Which of the following is true?

Scenario: Vacant houses, foreclosed or abandoned, are typically boarded up with plywood that many people consider unsightly and likely to invite vandalism. An alternative is clear plastic (polycarbonate) panels. The figure below shows the demand and the supply of polycarbonate panels used for boarding up houses in a hypothetical town. To answer some of the questions below, it will be useful to find the equations of the three lines in the figure. -Refer to the scenario above.The deadweight loss associated with ignoring external benefits is ________.Use the equations of the demand and the supply curves.

Tom is willing to contribute $400 toward building a public park,Jack is willing to contribute $500,and Joe is willing to contribute $750.What is the total value of the park if Tom,Jack,and Joe are the only residents in the neighborhood where the park is being built?

A Pigouvian tax is a tax designed to ________.

Scenario: A chemical factory is located upstream on a river. The factory dumps its liquid waste into the river. A microbrewery is located downstream on this river; it uses the river water in its production process and values the clean water. The chemical factory can filter its liquid waste before dumping it into the river, but it would be costly to the factory. The table below shows the profit to these two businesses under different circumstances. -Refer to scenario above.Suppose the negotiation between the chemical factory and microbrewery is costless.What is the maximum that the microbrewer would be willing to pay the chemical factory to filter its waste?

Scenario: Currently, major corn-growing states, such as Iowa, use large amounts of nitrogen-based fertilizers. Many of Iowa's corn-growing regions are characterized by karst topography (water erodes the limestone bedrock and forms sinkholes, caves, and underground streams). In karst landscapes, runoff from corn fields contains high levels of nitrogen in the form of nitrates, which can pollute private and municipal water wells. Suppose the demand and supply for corn are: Corn Demand: Qᴰ = 70 - 5p, Corn Supply: Qˢ = 10p - 5, where quantity is millions of bushels of corn and price is dollars per bushel. The marginal private benefit of corn and the marginal private cost of corn production can be derived by rewriting demand and supply with price as a function of quantity: Inverse Demand: p = 14 - 0.2Q Marginal Private Benefit: MPB = 14 - 0.2Q Inverse Supply: p = 0.1Q + 0.5 Marginal Private Cost: MPC = 0.1Q + 0.5 Suppose the marginal external cost (MEC) of nitrogen fertilizer use in corn growing is a constant $1.50 per bushel, so MEC = 1.5. The marginal social cost (MSC) is: MSC = MPC + MEC = 0.1Q + 0.5 + 1.5 MSC = 0.1Q + 2 The figure below shows these marginal benefits and marginal costs. -Refer to the scenario above.The private market equilibrium price is ________ per bushel,and the private market equilibrium quantity is ________ bushels.

The figure below shows the demand, supply, and marginal social benefit curves for Good Y. -Refer to the figure above.Social welfare will be maximized if ________ units of Good Y are produced.

________ is an example of a common pool resource good.

Most municipalities and states in the northeastern United States use rock salt to "produce" ice-free roadways in the face of winter snowstorms.But using rock salt has several drawbacks: it speeds up corrosion of bridges and cars; it can choke vegetation; as runoff,it is harmful to creeks and rivers; and it is not very effective in de-icing roads at low temperatures.If the marginal private cost of rock salt is $60 per ton and the marginal external cost of rock salt is $10 per ton,the optimal corrective tax is ________.

The congestion charge is an example of ________ to the negative externality associated with common pool resources.

Scenario: Ron plays loud music, which prevents his neighbor from studying. He knows that his neighbor values studying at $5,000, while the cost of soundproofing Ron's room is $3,000. -Refer to the scenario above.If Ron has the right to listen to music at night,how much does his neighbor need to pay him to stop playing music?

When does a private solution to a negative externality fail to allocate resources efficiently?

Rural/Metro-a private,subscription-based fire protection and emergency service provider-was founded by Lou Witzeman in 1948.Witzeman lived in an unincorporated suburb of Phoenix that did not provide fire-fighting services.Witzeman canvassed his neighbors and found that nearly all of them promised to pay him $10/year to provide fire protection.After investing his last $900 in a truck and firefighting equipment,most of his neighbors refused to pay him.This is an example of a ________.

Scenario: The production of a good creates a negative externality. The following figure shows the market for this good. -Refer to the scenario above.The socially optimal level of output for this good is ________,while the market produces ________.

________ are non-rival in consumption.

Scenario: Jim and Jane are the only residents of an apartment building. The figures below show their demand curves for security guards (in hours of duty per day) who staff the entrance to the apartment. To answer some of the questions below, it will be useful to find the equations of the two lines in the figure. -Refer to the figure above.If the price of security guards' time is $40 per hour,how many hours of guards' time would be demanded?

The market demand curve for a good shows ________,and the market supply curve shows ________.

Why are public goods non-rival in consumption? Explain with a real-world example.

The local community of the town of Montesia decides to plant trees every month as part of its green initiative.Which of the following is true?

The marginal social benefit from the production of the last unit of a good is $4,800.If the willingness to pay for that unit is $3,900,what is the external benefit from its production?