Exam 10: Externalities and Property Rights

The following data show the relationship between the number of drivers who leave for work at 8:00 a.m., their average commute time, and their marginal benefit of commuting. Number of Drivers Who Leave at 8 am Average Commute Time Marginal Benefit 100 30 minutes \ 10 200 65 minutes \ 8 300 110 minutes \ 4 400 170 minutes \ 3 500 260 minutes \ 1 One way for the government to increase economic efficiency would be for it to:

A positional externality:

Refer to the figure below. The socially optimal quantity of paper is ______ tons per year.

Suppose that in most car collisions between cars of unequal size, the smaller car sustains the most damage and its occupants suffer the most injury. In answering the following question, assume that, on average, smaller cars generate less air pollution than larger cars and that every person in the economy drives at least one car. Suppose the size of all cars increased by 25%. Collisions between two cars would cause ______ and air pollution would ______.

A village has five residents, each of whom has an accumulated savings of $50. Each villager can use the money to buy a government bond that pays 10% interest per year or to buy a year-old goat, send it onto the commons to graze, and sell it after one year. The price of the goat that the villager will get at the end of the year depends on the amount of weight it gains while grazing on the commons, which in turn depends on the number of goats sent onto the commons, as shown in table below. Assume that if a villager is indifferent between buying a bond and buying a goat, the villager will buy a goat. $\begin{array} { | c | c | c | } \hline \begin{array} { c } \text { Number of goats } \\\text { on the commons }\end{array} & \begin{array} { c } \text { Price per 2-year } \\\text { old goat (\$) }\end{array} & \begin{array} { c } \text { Income per goat } \\\text { (\$/year) }\end{array} \\\hline 1 & 80 & 30 \\\hline 2 & 75 & 25 \\\hline 3 & 70 & 20 \\\hline 4 & 65 & 15 \\\hline 5 & 55 & 5 \\\hline\end{array}$ If the villagers purchase the socially optimal number of goats and bonds, then total village income will be ______.

An external benefit implies that private markets will provide ______ than the socially optimal quantity, and an external cost implies that private markets will provide ______ than the socially optimal quantity.

Suppose that a vaccine is developed for a highly contagious strain of flu. The likelihood that anyone will get this flu decreases as more people receive the vaccine. One of the demand curves below represents the private demand for the vaccine and the other represents the social demand for the vaccine. The external benefit of each dose is:

Early settlers in the town of Dry Gulch drilled wells to pump as much water as they wanted from the single aquifer beneath the town. (An aquifer is an underground body of water.) As more people settled in Dry Gulch, the aquifer level fell and new wells had to be drilled deeper at higher cost. The town council has proposed putting a meter on each household's pump, and charging residents for each gallon of water used. This would:

If the production of a good generates a negative externality, then at the market equilibrium quantity, the marginal cost to society of another unit of the good will be:

Refer to the figure below. At the private market equilibrium quantity, the social marginal cost of the last unit produced is ______ the marginal benefit of the last unit produced.

Kate and Ali can live together a two-bedroom apartment for $600 per month, or they can each rent a one-bedroom apartment for $400 per month. Apart from the rent, they are indifferent between living together and living apart, except for one problem: Kate hates Ali's taste in music. Kate would be willing to pay up to $100 a month to avoid hearing Ali's music. Ali would give up listening to her music for no less than $300 per month. Which, if any, of the following ways of splitting the total monthly rent would induce them to live together?

If either the production or consumption of a good generates an external cost, then the:

The tragedy of the commons refers to the:

Refer to the figure below. In this case, the private market ______ resources efficiently because ______.

If the market equilibrium quantity is less than the socially optimal quantity, one can infer that:

Suppose Erie Textiles can dispose of its waste "for free" by dumping it into a nearby river. While the firm benefits from dumping waste into the river, the waste reduces fish and bird reproduction. This causes damage to local fishermen and bird watchers. At a cost, Erie Textiles can filter out the toxins, in which case local fishermen and bird watchers will not suffer any damage. The relevant gains and losses (in thousands of dollars) for the three parties are listed below. With Filter Without Filter Gains to Erie \ 200 \ 400 Fisherman \ 180 \ 50 Bird Watchers \ 130 \ 25 Local fishermen and bird watchers would be willing to compensate Erie Textiles ______ for operating with a filter.

Suppose Erie Textiles can dispose of its waste "for free" by dumping it into a nearby river. While the firm benefits from dumping waste into the river, the waste reduces fish and bird reproduction. This causes damage to local fishermen and bird watchers. At a cost, Erie Textiles can filter out the toxins, in which case local fishermen and bird watchers will not suffer any damage. The relevant gains and losses (in thousands of dollars) for the three parties are listed below. With Filter Without Filter Gains to Erie \ 200 \ 400 Fisherman \ 180 \ 50 Bird Watchers \ 130 \ 25 Suppose that Erie Textiles can only negotiate with one of the affected groups. Will Erie operate with a filter?

Lunch in Jamie's dorm is an all-you-can-eat buffet, served from 11 a.m. until 1 p.m. By noon, the buffet is picked over, and by 12:30, there are very few popular items left. The garbage bins, though, are full of food. The buffet in Jamie's dorm is an example of:

Which of the following is NOT an example of an activity with external benefits?

This graph shows the marginal cost and marginal benefit associated with roadside litter clean up. Assume that the marginal benefit curve and marginal cost curve each have their usual slope. The marginal cost of litter removal ______ due to ______.