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Assignment #7 Name: Anthony Bevilacqua Tutorial Number: 10 Due the week of October 30th at the beginning of tutorial. Please hand in a physical copy of your assignment before tutorial begins. Late assignments will not be accepted. Answers for assignment questions will be provided in tutorial only and not posted to Brightspace. Content for this assignment can be found in your textbook Chapters 10-11. /46 1. Give an example of a negative externality and an example of a positive externality. /2 Positive Externality – biking to work reduces air pollution and congestion on roads Negative Externality – bitcoin mining causes very high carbon emissions 2. Draw a supply-and-demand diagram and explain the effect of a negative externality in production. /2 3. In what way does the patent system help society solve an externality problem? /2 The patent system ensures that those who are responsible for creating a new technology can reap the financial benefits of said technology. Without patents, others could profit and gain market share on a technology that they had no hand in creating, taking away in the inventor’s ability to maximize their own profit. 4. List some of the ways that the problems caused by externalities can be solved without government intervention. /2  Charities raise money to help solve relevant social issues.  Moral codes and social sanctions levied by society at corporate entities.  The stipulations within contracts.

5. Imagine that you are a nonsmoker sharing a room with a smoker. According to the Coase theorem, what determines whether your roommate smokes in the room? Is this outcome efficient? How do you and your roommate reach this solution? /4 According to the Coase theorem, negotiating a solution with my smoker roommate would determine whether my roommate smokes in the room or not. This outcome is efficient as it can lead to a solution that works for both me as well as the roommate. We would be able to reach this solution so long that negotiations between us do not break down and that the terms of a made agreement between us (transaction costs) are followed. 6. What are corrective taxes? Why do economists prefer them over regulations as a way to protect the environment from pollution? /4 Corrective taxes are taxes that governments put in place to limit the effects of a negative externality. The optimal corrective tax should equal the cost that a negative externality causes. Economists prefer corrective taxes over regulations because they can rely on private incentives that align to societal needs rather than outright standing in opposition to corporate interests and incentives through government regulations. 7. Consider the market for fire extinguishers. /4 a. Why might fire extinguishers exhibit positive externalities? Fire extinguishers might exhibit positive externalities since in addition to protecting someone’s property in the event of a fire, it also keeps whoever happens to be in the building safe. b. Draw a graph of the market for fire extinguishers, labelling the demand curve, the social-value curve, the supply curve, and the social-cost curve. c. Indicate the market equilibrium level of output and the efficient level of output. Give an intuitive explanation for why these quantities differ. d. If the external benefit is $10 per extinguisher, describe a government policy that would result in the efficient outcome.

8. Ringo loves playing rock-and-roll music at high volume. Luciano loves opera and hates rock and roll. Unfortunately, they are next-door neighbours in an apartment building with paper-thin walls. /6 a. What is the externality here? The externality here is a negative externality, as Luciano must endure the consequences of Ringo’s actions (playing loud rock music that Luciano hates) without receiving anything back in return. b. What command-and-control policy might the landlord impose? Could such a policy lead to an inefficient outcome? The landlord could impose a ban on playing loud rock music within the apartment building. This could lead to an inefficient outcome since there is no incentive for Ringo to go beyond the limits set by the landlord. Ringo could for example play loud music of another genre he may like such as rap music, or only play it when he is under the impression that Luciano is not home. c. Suppose the landlord lets the tenants do whatever they want. According to the Coase theorem, how might Ringo and Luciano reach an efficient outcome on their own? What might prevent them from reaching an efficient outcome? According to the Coase Theorem, Ringo and Luciano could negotiate with each other to determine a solution that makes both parties happy, for example Luciano could ask Ringo to only play loud rock music if it’s before 7pm. Negotiations breaking down might prevent them from reaching an efficient outcome, for example, perhaps that Ringo does not get off of work until later in the evening and listening to rock music is what he derives most of his enjoyment and fun from. 9. Both public goods and common resources involve externalities. /6 a. Are the externalities associated with public goods generally positive or negative? Use examples in your answer. Is the free-market quantity of public goods generally greater or less than the efficient quantity? The externalities associated with public goods are generally positive. An example of this would be our armed forces, as the benefits of having them as a public good (keeping us safe from foreign invaders) far outweigh the negatives. The free-market quantity of public goods is generally less than the efficient quantity. b. Are the externalities associated with common resources generally positive or negative? Use examples in your answer. Is the free-market use of common resources generally greater or less than the efficient use? Externalities associated with common resources are generally negative, since one person’s use of them diminishes the ability for others’ use of the resource. An example would be fish in a lake. If someone goes fishing and takes 20 fish with them, there are now 20 less fish available for others to acquire from the lake. The free-

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market use of common resources is generally less than the efficient use since it is difficult to exclude people from using them, meaning they are often overused. 10. Charlie loves watching Downton Abbey on his local public TV station, but he never sends any money to support the station during its fundraising drives. /6 a. What name do economists have for people like Charlie? A Free Rider – who receives the benefit of a good or service without paying for it. b. How can the government solve the problem caused by people like Charlie? The government could place a tax its citizens where the funds generated would be redirected back towards local public TV stations, which would help fund production costs of TV stations, ensuring they are paid for their work. c. Can you think of ways the private market can solve this problem? How does the existence of cable TV alter the situation? A corporate actor in the private market can purchase the rights to Downton Abbey and put it on a platform (like Cable TV) where viewers must pay some fee to watch the show, ensuring that the benefits of the show are paid for by all that use it. 11. Why is there often litter along most highways but rarely in people’s yards? /4 The excess of litter along most highways is due to the Tragedy of the Commons . Since a highway is a common resource that gets a lot of usage from society, there is no single party that is responsible for the cleanliness of the highway, as well as no incentives to promote picking up litter along the highway. In people’s yards, there is an incentive to maintain your property since it can affect the value of your property as well as adjacent properties on the street, meaning that people’s yards are more likely to be well-maintained. 12. High-income people are willing to pay more than lower-income people to avoid the risk of death. For example, they are more likely to pay for safety features on cars. Do you think cost–benefit analysts should take this fact into account when evaluating public projects? Consider, for instance, a rich town and a poor town, both of which are considering the installation of a traffic light. Should the rich town use a higher dollar value for a human life in making this decision? Why or why not? /4 The rich town should not use a higher dollar value for a human life. Ensuring that the population of a town are safe when travelling can lead to a positive externality, in this case, the ability for someone to safely continue participating in the economy (whether that be going to eat at a restaurant, commuting to work, etc.). If a resident of the town dies in a car accident, there is no way for that resident to generate any revenue for the town. This externality would still exist whether the town was rich or poor, and it would likely be more emphasized in a rich town.

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