Exam 10: Externalities and Property Rights

Your economics professor has announced the following grading policy: For each exam,the highest score in the class will be entered as a 100%;all other scores will be entered as the percent of that top score.For example,if the highest test score is 50 out of 100,it will be counted as a perfect paper,and exams with a score of 40 out of 100 will be entered as an 80%.The final grade for the course will be determined using these adjusted percentages,with 90% and above an A,80% and above a B,70% and above a C,and below 70%,not passing. Refer to the information given above.The students all get together and decide not to study for the next exam because if nobody does extremely well,they will all do okay.This plan:

From the individual's standpoint,participating in a positional arms race is a _________.From society's point of view,it is __________.

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.The Coase Theorem would predict that if the property right to smoke belongs to the cigar smoker,then there ________ smoking in the room.If the property right to clean indoor air belongs to the room occupants,then there ________ smoking in the room.

The inefficiency induced by all positional arms races is that:

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.An argument for imposition of a toll rather than using a negotiated solution of the type suggested by the Coase Theorem is that:

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.When the United States demonstrated its nuclear capability in the 1940's,the predictable result was:

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.A few weeks later the firm began offering a second hour of overtime at 1.5 times their base hourly wage and that both Fran and Shel worked that second additional hour.An effective mechanism to avoid working all day and all night as their employer offers more and more overtime,Fran and Shel could:

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.Fran has bought a new Jaguar (a luxury car)and shortly thereafter Shel bought a new Mercedes (also a luxury car).Shel and Fran seem to be:

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.The actual monthly gain in surplus to Curly and Moe from living together after addressing the snoring problems in the least costly way is:

Which of the following is an example of an activity with an external cost?

The tragedy of the commons is an example of:

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.The aquifer beneath Dry Gulch is:

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 the 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 (in thousands of dollars)and losses for the three parties are listed below. With Filter Without Gains to Erie \ 200 \ 400 Fishermen \ 180 \ 50 Bird Watchers \ 130 \ 25 Refer to the information given above.When Erie Textiles operates with a filter,the total daily gain (in thousands of dollars)by all three parties is _______.

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.According to this graph,the marginal benefit of litter removal is maximized when the ___ bag is removed.

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 the 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 (in thousands of dollars)and losses for the three parties are listed below. With Filter Without Gains to Erie \ 200 \ 400 Fishermen \ 180 \ 50 Bird Watchers \ 130 \ 25 Refer to the information given above.Suppose you observe that Erie has not added a filter.You could conclude that the Coase Theorem failed to solve the externality problem because:

Which of the following is an example of a positional arms control agreement?

The reason buffalo were driven to extinction while at the same time cattle were thriving is that:

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

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 in the diagram reflects private benefits and the other reflects social benefits. Refer to the figure above.Private benefits are measured by ______,and social benefits are measured by _____.

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.The Nash equilibrium in this situation is for: