Deck 7: Externalities and Public Goods, Employment and Unemployment

Question 1

In Brazil, more than 60 percent of sugar cane grown is harvested by hand. In São Paulo state, nearly 300,000 workers are employed in sugar cane harvesting. Manual harvesting requires burning the cane fields prior to harvest to remove the cane?s sharp leaves and drive snakes from the fields. Burning the cane fields, however, gives off large quantities of ammonia and nitrogen oxide, which lead to ozone creation. In São Paulo state, a layer of ash covers cars, and nitrogen oxide levels double during the harvest period. The nitrogen oxide produced from burning the cane fields can lead to acid rain and changes in water quality.

-Refer to the scenario above. In the graph below, the socially optimal level of production occurs at which point?

A) Q₀
B) Q₁
C) Q₂
D) Q₃

Answer 1

Q₂

Question 2

In 1973, economist Steven N. S. Cheung wrote an article demonstrating that private bargaining between beekeepers and agricultural producers achieved the efficient outcome in the market for pollination services in Washington state ("The Fable of the Bees: An Economic Investigation." Journal of Law and Economics 16, no. 1 (1973): 11-33). Strong colonies of honeybees are necessary for pollinating some crops, and they also increase yields. Colonies that are co-located with good pollen sources produce more honey. Suppose the following facts describe the market for pollination services for seed alfalfa in Washington state: seed alfalfa growers harvest an additional $4,000 worth of alfalfa seed when honeybees are co-located with their crop; beekeepers realize an additional $1,500 worth of honey when their bee colonies are co-located with alfalfa; and the cost of moving to another alfalfa grower's field is $500. What amount of payment from the alfalfa grower to the beekeeper will result in a market for pollination services that achieves the efficient outcome? Explain your answer.

A) $0
B) $500
C) $2,000
D) $5,000

Answer 2

$2,000

Question 3

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?

A) Property rights for players' services are not clearly defined in MLB.
B) The number of teams relative to the number of players is large.
C) MLB is a monopoly in professional baseball games in the United States.
D) Transaction costs are associated with negotiating with individual free agents.

Answer 3

Transaction costs are associated with negotiating with individual free agents.

Question 4

In episode 12 of the sixth season of The Sopranos, A. J. is watching television with his girlfriend Bianca at her apartment when a group of neighborhood youths begins playing music at a very loud level outside. A. J. approaches the youths and offers them his new mountain bike if they will stop playing the music and leave. The group of youths accepts the mountain bike and leaves. This scene is an example of ________.

A) pecuniary externality
B) high transaction costs preventing bargaining from reaching the efficient outcome
C) the large number of parties involved in an exchange preventing bargaining from reaching the efficient outcome
D) the Coase Theorem

Question 5

What constitutes evidence for the efficacy of the congestion charge described in the text?

A) The total emission from vehicles in the regulated area of London declined after the introduction of the congestion charge.
B) The distance traveled by all private vehicles in the regulated area of London declined after the introduction of the congestion charge, while more distance was traveled by public transportation.
C) The distance traveled by private vehicles in the regulated area of London declined after the introduction of the congestion charge, while more distance was traveled by high-occupancy vehicles and low-emission vehicles.
D) The revenue to the city government of London has dramatically increased.

Question 6

The following table defines some population statistics for two countrries.
If a group of students decided to try to find jobs while they are studying, which of the above rates would change at first? Assume that it takes the students a few months to actually find a job.

A) Only the unemployment rate would increase.
B) Both the labor participation rate and the unemployment rate would increase.
C) Only the labor participation rate would increase.
D) The labor participation rate would increase and the unemployment rate would decrease.

Question 7

The following table defines some population and employment statistics for two countries.


-Refer to the table above. Due to technological changes, older workers have difficulty finding jobs in Spicy Country. The unemployment rate for people older than 60 is much greater than the unemployment rate for the general population. If a new policy allowed workers in Spicy Country to retire at age 60, what is likely to happen?

A) The unemployment rate will decrease.
B) The labor participation rate will increase.
C) The number of people not in the labor force will decrease.
D) The number of unemployed workers will increase.

Question 8

Which of the following statements is true?

A) All else being equal, the incentive to look for a job is higher for an individual with a lower opportunity cost of time.
B) All else being equal, the incentive to look for a job is lower for an individual with a lower opportunity cost of time.
C) All else being equal, a worker who earned a higher income previously but is now unemployed will have a lower opportunity cost of time than someone who had a lower income but is now unemployed.
D) All else being equal, a worker who earned a higher income previously but is now unemployed will have the same opportunity cost of time as someone who had a lower income but is now unemployed.

Question 9

Susan, Kevin, and Joshua are three individuals who were previously employed but do not have jobs now. Classify these three individuals according to their type of unemployment:
a) Susan lost her job a year ago. Although she would like to have a job, she has given up looking for one as she thinks there are no suitable jobs available for her.
b) Kevin was working as a finance teacher, but quit his job a few months back to become a stockbroker. Ever since he quit his job, he has been unable to get a new one, although he is actively looking for one.
c) Joshua was employed in a steel mill. He lost his job when the labor union in his mill demanded a hike in wages.

Question 10

Truck drivers across the country are on strike in an effort to negotiate higher wages. Currently the labor market in this industry clears at W_M and Q_M, as shown in the figure below.


- Refer to the scenario above. Assume that the negotiations were successful and a minimum wage has been implemented. Shortly thereafter, new technology that allows trucks to drive without drivers becomes available. How is the equilibrium in the driver market likely going to change?

A) The new wage rate will be above W_M, the new quantity of drivers supplied will be above Q_M, and the new quantity of drivers demanded will be below Q_M.
B) The new wage rate will be below W_M, and the new quantity of labor will be above Q_M.
C) The new wage rate will be above W_M, and the new quantity of labor will be below Q_M.
D) The new wage rate will be below W_M, the new quantity of drivers supplied will be below Q_M, and the new quantity of drivers demanded will be above Q_M.

Question 11

The figure below shows labor supply and labor demand curves.


-Refer to the figure above. John's reservation wage is w₁ and Joy's reservation wage is w₂. Assume that a minimum wage is implemented at w₁. John and Joy are both unemployed. What is true about John and Joy?

A) Joy is voluntarily unemployed, and John is involuntarily unemployed.
B) John is voluntarily unemployed, and Joy is involuntarily unemployed.
C) John and Joy are both voluntarily unemployed.
D) John and Joy are both involuntarily unemployed.

Question 12

The following figure illustrates the labor demand curve, LD₁, and labor supply curve, LS₁, in the market for engineers.
a) What are the equilibrium wage rate and employment level in the market?
b) If the government thinks that engineers are underpaid in the country and fixes a minimum wage of $50 per hour, what will be the impact on the level of employment?
c) If engineers unionize themselves and negotiate a wage that is $30 higher than the market-clearing wage, what will be the impact on the employment level?