Chapter 5 Homework

How do externalities affect markets?

If a negative externality in production is present in a market, then

How do externalities in the production of electricity result in market failure?

Because of externalities, the market for electricity will

Externality

Consider the market illustrated in the figure. Supply curve S1 represents the private cost of production and demand curve D1 represents the private benefit of consumption. Suppose consuption of this good creates a positive externality. Show how the externality affects the market.

1) Draw either a new supply or new demand curve incorporating the positive externality in consumption.

2) Indicate the market equilibrium price and quantity.

3) Indicate the effective equilibrium price and quantity.

How do property rights affect externalities and market failure?

Property rights

Suppose the figure to the right illustrates the marginal cost and marginal benefit from reducing sulfur dioxide pollution. Suppose also that the United States is currently planning to eliminate 5.5 million tons of pollution per year.
What would be the net benefit to the United States of instead eliminating 10.0 million tons of sulfur​ dioxide?
Use the triangle drawing tool to shade in the net benefit to society from eliminating 10.0 million tons of pollution per year compared to eliminating 5.5 million tons of pollution. Label this shaded area​ 'Net benefit'. 

What must be true for the Coase Theorem to hold?

For the Coase Theorem to hold.

The Coase Theorem

Suppose the production of electricity by a utility generates pollution that harms others. Suppose also that Coase bargaining can occur between the utility and the victims of pollution but that the utility has not been legally liable for the damages from its pollution. How would making the utility legally liable for the damages from its pollution affect pollution​ reduction?

If the electric utility and the people suffering the effects of the​ utility's pollution can​ bargain, then making the utility legally liable for the damages from its pollution will

How might society solve problems associated with externalities and market failure​?

If an externality is​ present, resulting in market​ failure, then

Market failure

Transaction costs

Which of the following is an example of transaction cost associated with negotiating the reduction of a negative externality?

An example of a transaction

How might transaction costs affect private solutions to externality problems?

Transaction costs

Command-and-control approach

Suppose the government requires each firm to reduce sulfur dioxide emissions by an equal amount such that total emissions are reduced by 8.5 million tons per year. Is this approach necessarily economically​ efficient?
This​ command-and-control approach

Suppose the figure to the right illustrates the market for toilet​ paper, where Upper S 1S1 represents the marginal private cost of production and Upper D 1D1 represents the marginal private benefit from consumption. Companies that produce toilet paper bleach the paper to make it white. Some paper plants discharge the bleach into rivers and​ lakes, causing substantial environmental damage. Assume that Upper S 2S2 represents the marginal social cost of producing toilet paper​ (incorporating the​ externality). What could the government do to internalize the​ externality?

Pigovian taxes and subsidies

In​ particular, the government should set a Pigovian tax of ​$
150 per ton of toilet paper produced.

​Cap-and-trade system

Suppose the United States has two​ utilities, Commonwealth Utilities and Consolidated Electric. Both produce 20 million tons of sulfur dioxide pollution per year.​ However, the marginal cost of reducing a ton of pollution for Commonwealth Utilities is ​$400 per ton and the marginal cost of reducing a ton of pollution for Consolidated Electric is ​$500 per ton. The​ government's goal is to cut sulfur dioxide pollution in half​ (by 20 million tons per​ year).
If the government issues 10 million tradable pollution permits to each​ utility, what will be the cost of eliminating half of the pollution to​ society?

If the permits are not​ tradable, what will be the cost of eliminating half of the​ pollution?

Companies producing toilet paper bleach the paper to make it white. The bleach is discharged into rivers and lakes and causes substantial environmental damage. The diagram to the right illustrates the situation in the toilet paper market. The private profit minusmaximizing output level is

Companies producing toilet paper bleach the paper to make it white. The bleach is discharged into rivers and lakes and causes substantial environmental damage. The diagram to the right illustrates the situation in the toilet paper market. Suppose the government wants to use a Pigovian tax to bring about the efficient level of production. What should the value of the tax​ be?

In England during the Middle​ Ages, each village had an area of​ pasture, known as a​ commons, on which any family in the village was allowed to graze its cows or sheep without charge. Was the common land used​ optimally?

Consider the market illustrated in the figure to the right for fishfish from the oceanthe ocean. Suppose the fishfish are a common resource. Supply curve Upper S 1S1 represents the private cost of production and demand curve Upper D 1D1 represents the private benefit from consumption. Show how the private market overuses common resources.
​1.) Use the line drawing tool to first draw either a new supply ​(Upper S 2S2​) or demand ​(Upper D 2D2​) curve showing the true cost of catching fishcatching fish. Properly label this line.
​2.) Use the point drawing tool to indicate the actual price and quantity in the private market. Label this point​ 'Actual equilibrium'.
​3.) Use the point drawing tool to indicate the efficient equilibrium price and quantity. Label this point​ 'Efficient equilibrium'.

A small town provides a fireworks​ display, which is a public​ good, every fourth of July. For​ simplicity, assume the town only has two​ residents: Hayden and Madison. Their demands for the fireworks display are illustrated in the figure to the right. Construct the market demand curve for this public good.
Use the line drawing tool to draw the market demand curve ​(DMarket​) for the fireworks display. Properly label this line.

Private good

Public good

Quasi-public good

Common resource

Rivalry

Excludability

Consider the consumption of national defense. What type of good is national defense?
National defense is

Consider the consumption of public pasture land. What type of good is public pasture land?

Public pasture land is

Consider the market for a public good such as dams along a river, illustrated in the figure to the right where S 1 represents marginal private costs and D 1 represents marginal private benefits. The dashed green line represents the corresponding marginal social benefit.

Suppose a new recreational neighborhood park would cost​ $20,000, including opportunity​ costs, to construct and maintain. If​ built, the park would be a public good. For​ simplicity, assume the neighborhood park would be used by three​ families, each of whom would derive a marginal benefit equivalent to​ $8,000 from the park.
Should the neighborhood park be​ built?

If left to the private​ market, without private bargaining or government​ intervention, would the park be​ built?

Suppose a common resource—wood in a public forest—is being overused because residents consider the benefits of gaining firewood or wood for building but do not account for the cost of deforestation when chopping down trees. What could be done to prevent wood in the forest from being​ overused?
To prevent overuse of the common​ resource,

Consider a Lacoste shirt. Is the consumption of Lacoste shirts rival and excludable?

The consumption of Lacoste shirts is