Exam 9: Externalities and Public Goods

Suppose only dues-paying members of a private outdoor sports club can access a lake.Club members who are operating their jet skis on the lake disrupt the bass fishing of other club members.This example describes a ________.

The production of a certain fertilizer emits a gas that keeps away mosquitoes and other insects from the surrounding community.This is an example of ________.

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 market supply of guards' time is as in the figure below,what is the optimal number of guard's time for Jim and Jane?

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 microbrewery has the right to clean water.What would the Coase Theorem suggest as the resolution of this negative externality conflict between these two firms?

A free rider is a person who ________.

A concert in a crowded auditorium is ________ in consumption.

Which of the following is true?

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 scenario above.To construct the market (Jim and Jane)demand curve for security guards,you must add the two curves ________,since security guard's service is ________.

Energy Star is a voluntary labeling program designed to identify and promote energy-efficient products to reduce greenhouse-gas emissions.In this example,________ is used to solve an externality.

A green pasture has turned barren due to overgrazing.This has happened because the pasture was ________.

Scenario: The following excerpt is from Timothy R. Hylan, Maureen J. Lage, and Michael Treglia, "The Coase Theorem, Free Agency, and Major League Baseball: A Panel Study of Pitcher Mobility from 1961 to 1992" ( Southern Economic Journal 62, no. 4 (1996): 1029-42). Many economists and legal scholars interpret the [Coase] theorem as containing two propositions. The first is that, in the absence of transactions costs and wealth effects, parties will bargain to an efficient outcome. The second holds that the same outcome will be achieved regardless of the distribution of property rights. … Major League Baseball [MLB] presents a natural experiment consisting of an industry in which there has been an explicit change in the assignment of property rights. Beginning in 1879, … a player could negotiate salary only with the team that owned his contract and the team could trade or sell the player as management saw fit. In 1976 this system was replaced by the institution of free agency whereby a player with at least six years of Major League experience acquired the right to sell his services to prospective buyers…. The empirical analysis shows that after the introduction of free agency, the pitchers with greater longevity in the major leagues are less likely to move relative to their mobility in the pre-free agency period. The results also indicate that, in general, better pitchers are less likely to move and that pitchers playing on teams with higher winning percentages or in large market cities were less likely to move. -Refer to the scenario above.Which of the following could be a cause for different patterns of player mobility in MLB before and after 1976?

Why does the presence of negative externalities in the production of a good lead to an overproduction of the good?

Efficient government intervention requires that ________.

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 figure below.The deadweight loss arising in the private market equilibrium is area ________ and is equal to ________.

If positive externalities are present in a free market,________ at any output level.

Smoking increases the risk of lung infections not only for active smokers but also for other people inhaling the smoke passively.Which of the following will help reduce smoking?

Scenario: The following figure shows the private cost and social cost of producing Good X. Firm A is the producer of Good X. The production plant and Bob's house are located next to a river. However, the plant is upstream, and Bob's house is downstream. Since production pollutes the river, Bob suffers from a negative externality. -Refer to the scenario above.If the property rights to the river belong to the firm,what is the maximum transfer between the two party necessary to make the firm produce the socially optimal quantity?

A ________ externality occurs when a market transaction affects others through market prices.

Which of the following will lead to an efficient private solution if negative externalities are present in a market?

Externalities essentially create ________.