Exam 10: Externalities and Property Rights

A village has five residents,each of whom has 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. $\begin{array} { c c c } \begin{array} { c } \text { Number of goats } \\\text { on the commons }\end{array} & \begin{array} { c } \text { Price per 2-year-old } \\\text { goat (\$) }\end{array} & \begin{array} { c } \text { Income per goat } \\\text { (\$/year) }\end{array} \\1 & 80 & 30 \\2 & 75 & 25 \\3 & 70 & 20 \\4 & 65 & 15 \\5 & 55 & 5\end{array}$ Refer to the information given above.Suppose a village elder decides the total number of goats and bonds with the goal of maximizing total village income.The village income will be _______.

The following payoff matrix shows the outcomes for the US and the USSR from relying on conventional weapons or atomic weapons.The percentages refer to the fraction of the population that would die if a war occurred under the two weapons strategies.Assume the payoff matrix is for 1945,shortly after the US had demonstrated the effectiveness of the atomic bomb in World War II,i.e. ,the example begins in the upper right cell where USA has atomic weapons and the USSR has only conventional weapons. USSR USA Atomic Weapons Conventional Atomic In the USA, 60\% would die, In the USA S\% would die, Weapons In the USSR, 60\% would die In the USSR, 90\% would die Conventional In the USA, 90\% would die; In the USA 10\% would die, In the USSR, 5\% would die In the USSR, 10\% would die.. Refer to the information given above.Suppose that a diplomat representing the USSR made the following statement to a diplomat representing the United States: "We will disarm all of our atomic weapons and not develop any new ones." That statement is:

If the external cost of an activity is added to the private costs,then the:

As preferences for a clean environment increases,the socially optimal quantity of pollution will:

Suppose there are ten people playing cards in a room.One of them wants to smoke a cigar;nine of them dislike the smell of cigar smoke.The smoker values the privilege of smoking at $5,and each of the other nine occupants of the room would be willing to pay fifty cents for clean air in the room.The rules governing use of the room state that smoking is not allowed unless everyone agrees to allow smoking. Refer to the information given above.If the rules governing the room instead stated that smoking is allowed unless everyone in the room agrees to prohibit it:

The following data show the relationship between the number of drivers who leave for work at 8:00 am,their average commute times,and their marginal benefit associated with the commute times. Number of drivers Average commute Marginal 100 30 minutes \ 10 200 65 minutes \ 8 300 110 minutes \ 4 400 170 minutes \ 3 500 260 minutes \ 1 Refer to the information given above.The reason drivers would prefer building new roads to a $5 toll to reduce commute times is because:

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 and that every person in the economy drives at least one car. Refer to the information given above.Relative to driving an average car,driving a larger-than-average car generates:

Taylor lives in a residential neighborhood that prides itself on well-groomed lawns.Taylor's neighbors find that the collective marginal benefit of someone else's well-groomed lawn is $10.Taylor,however,dislikes yard work and receives zero net benefit from an unkempt lawn and a net benefit of -$1 for a well-groomed lawn;the cost of maintaining the lawn is a dollar more than the benefit of having a well-groomed lawn. Unkempt Well-groomed Net Value to Taylor 0 -1 Net Value to Taylor's neighbors 0 +10 Refer to the information given above.The Coase Theorem suggests that:

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. Refer to the information given above.Each resident of Dry Gulch has a private incentive to ____ water because _____.

Shel and Fran are neighbors.They work at the same firm and hold the same title.Shel finds that when Fran's consumption rises,Shel feels worse off.Fran feels the same way towards Shel's consumption. Refer to the information given above.Suppose that the firm that employs both Fran and Shel began offering an hour of overtime at 1.5 times their base hourly wage and that both Fran and Shel worked the additional hour.Now suppose that the firm that employs Fran and Shel offers a second hour of overtime also at 1.5 times their base hourly wage.One can predict that:

Suppose that the EPA has proposed strict controls on the amount of sulfur that diesel fuel contains.These controls were designed to fully offset the cost of pollution generated by diesel fuel vehicles.The effect of the regulation is estimated to increase the equilibrium price of a gallon of diesel fuel by 10 cents. Refer to the information given above.Assuming that the supply of diesel fuel has a positive slope and demand has a negative slope,the quantity of diesel fuel sold after imposition of the regulation will:

The existence of a negative externality will result in:

The major implication of the _______ is that individuals can solve many externalities if they can buy and sell the right to generate the externality.

Curly and Moe are considering living alone or being roommates and splitting the rent for the next twelve months.If they live alone,they each rent a one bedroom,one bath apartment for $500 per month,while if they are roommates,they can split a two bedroom,one bath apartment for $800 per month.The one difficulty they have is that Moe snores very loudly.Curly estimates the cost of poor sleep due to Moe's snoring at $150 per month.Moe could obtain a snore-eliminating device for $50 per month. Refer to the information given above.Curly would be willing to pay _____ per month to eliminate Moe's snoring.

The following payoff matrix shows the outcomes for the US and the USSR from relying on conventional weapons or atomic weapons.The percentages refer to the fraction of the population that would die if a war occurred under the two weapons strategies.Assume the payoff matrix is for 1945,shortly after the US had demonstrated the effectiveness of the atomic bomb in World War II,i.e. ,the example begins in the upper right cell where USA has atomic weapons and the USSR has only conventional weapons. USSR USA Atomic Weapons Conventional Atomic In the USA, 60\% would die, In the USA S\% would die, Weapons In the USSR, 60\% would die In the USSR, 90\% would die Conventional In the USA, 90\% would die; In the USA 10\% would die, In the USSR, 5\% would die In the USSR, 10\% would die.. Refer to the information given above.As a result of the positional externality in this game:

Taylor lives in a residential neighborhood that prides itself on well-groomed lawns.Taylor's neighbors find that the collective marginal benefit of someone else's well-groomed lawn is $10.Taylor,however,dislikes yard work and receives zero net benefit from an unkempt lawn and a net benefit of -$1 for a well-groomed lawn;the cost of maintaining the lawn is a dollar more than the benefit of having a well-groomed lawn. Unkempt Well-groomed Net Value to Taylor 0 -1 Net Value to Taylor's neighbors 0 +10 Refer to the information given above.Taylor would be willing to keep a well-groomed lawn if the neighbors paid him:

The following payoff matrix shows the outcomes for the US and the USSR from relying on conventional weapons or atomic weapons.The percentages refer to the fraction of the population that would die if a war occurred under the two weapons strategies.Assume the payoff matrix is for 1945,shortly after the US had demonstrated the effectiveness of the atomic bomb in World War II,i.e. ,the example begins in the upper right cell where USA has atomic weapons and the USSR has only conventional weapons. USSR USA Atomic Weapons Conventional Atomic In the USA, 60\% would die, In the USA S\% would die, Weapons In the USSR, 60\% would die In the USSR, 90\% would die Conventional In the USA, 90\% would die; In the USA 10\% would die, In the USSR, 5\% would die In the USSR, 10\% would die.. Refer to the information given above.After both the USA and USSR have access to atomic weapons,the dominant strategy for the US is to employ __________,and for the USSR,the dominant strategy is to employ __________.

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 and that every person in the economy drives at least one car. Refer to the information above.Suppose the size of all cars increased by 25%.Collisions between two cars would cause ______ and air pollution would ______.

The following data show the relationship between the number of drivers who leave for work at 8:00 am,their average commute times,and their marginal benefit associated with the commute times. Number of drivers Average commute Marginal 100 30 minutes \ 10 200 65 minutes \ 8 300 110 minutes \ 4 400 170 minutes \ 3 500 260 minutes \ 1 Refer to the information given above.If commuters view the highway as having a zero price,one can predict that __________ drivers will leave for downtown at 8:00 am:

This graph shows the marginal costs and marginal benefits associated with roadside litter clean up.Assume that the marginal cost and marginal benefit curves slope in the usual directions. Refer to the information given above.From the graph,one can infer that: