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					Not really a quiz

 Just some material to help you prepare
  for your mid-term
 Chapter 10 and 11




                                           0
             Externalities (1)
 Using a supply and demand diagram,
 demonstrate how a negative externality leads to
 market inefficiency. How might the government
 help to eliminate this inefficiency?




                                                   1
                                                          Answer




 When a negative externality exists, the private cost (or supply curve)
   is less than the social cost. The market equilibrium quantity of Q0
   will be greater than the socially optimal quantity of Q1. The
   government could help eliminate this inefficiency by taxing the
   product. In this example, the size of the per-unit tax would be P3 -
   P1 (or P2 - P0).
                                                                          2
             Externalities (2)
 Using a supply and demand diagram,
 demonstrate how a positive externality leads to
 market inefficiency. How might the government
 help to eliminate this inefficiency?




                                                   3
                                                 Answer




 When a positive externality exists, the private value (or
  demand curve) is less than the social value. The market
  equilibrium quantity will be less than the socially optimal
  quantity. The government could help eliminate this
  inefficiency by subsidizing the product. In this example,
  the size of the per-unit subsidy would be P3 - P1.
                                                                4
                 Externalities (3)
 The Coase theorem suggests that efficient solutions to
  externalities can be determined through bargaining.
  Under what circumstances will private bargaining fail to
  produce a solution?

 ANSWER: Private parties may fail to bargain to an efficient
  solution under a variety of circumstances. First, the
  transaction costs of bargaining may be so high that one or
  both of the parties decides not to bargain. Second, the
  bargaining may not take place if one or both of the parties
  believes that the agreement cannot be enforced. Third, one or
  both of the parties may try to hold out for a better deal, in
  which case the bargaining process breaks down. Fourth, if
  there are a large number of parties taking part in the
  negotiations, the costs of coordination may be so great that
  the bargaining is not successful.
                                                                5
               Externalities (4)
 Use a graph to illustrate the quantity of pollution
  that would be emitted (a) after a corrective tax
  has been imposed and (b) after tradable
  pollution permits have been imposed. Could
  these two quantities ever be equivalent?




                                                        6
                       Answer




 Yes, these two quantities could be equal. For example,
  PB could be equal to the amount of the corrective tax.

                                                           7
Public Goods and Common Resources (1)
 Place each of the following in the
    correct location in the table.
   a.    Congested toll roads
   b.    Knowledge
   c.    Fish in the ocean                             Rival
   d.    National defense
                                                        Yes         No
   e.    Congested nontoll roads




                                       Excludable
                                                        Private     Natural
   f.    Cable TV                                  Y   Goods       Monopolies
   g.    The environment
   h.    Fire protection
                                                    N   Common      Public
   i.    Ice-cream cones                               Resources   Goods

   j.    Uncongested toll roads
   k.    Clothing
   l.    Uncongested nontoll roads


                                                                                 8
                 Answer
                 Rival

                 Yes                        No

                 Private Goods              Natural Monopolies
             Y
                 •Ice-cream cones           • Fire protection
Excludable




                 •Clothing                  •Cable TV
                 •Congested toll roads      •Uncongested toll roads

                 Common Resources           Public Goods
             N
                 •Fish in the ocean         •National defense
                 •The environment           •Knowledge
                 •Congested nontoll roads   •Uncongested nontoll
                                            roads


                                                                      9
Public Goods and Common Resources (2)
 Why do wild salmon populations face the
  threat of extinction while goldfish populations
  are in no such danger?


 ANSWER: No one owns the wild salmon, while private
  individuals own goldfish. The profit motive leads to different
  allocations of the resources. Salmon fishermen have an
  individual incentive to catch as many salmon as possible
  before someone else does. Pet shop owners have a profit
  incentive to breed goldfish to sell to consumers.




                                                                   10

				
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posted:8/31/2011
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