Principles of Microeconomics
7th Edition
ISBN: 9781305156050
Author: N. Gregory Mankiw
Publisher: Cengage Learning
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Question
Chapter 10, Problem 2CQQ
To determine
Negative externality and social cost curve.
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An externality arises when a firm or person engages in an activity that affects the well-being of a third party, yet neither pays nor receives any
compensation for that effect. If the impact on the third party is beneficial, it is called a
externality.
The following graph shows the demand and supply curves for a good with this type of externality. The dashed drop lines on the graph reflect the
market equilibrium price and quantity for this good.
Adjust the following graph to reflect the presence of the externality. If the social cost of producing the good is not equal to the private cost, then you
should shift the supply curve to reflect the social costs of producing the good; similarly, if the social value of producing the good is not equal to the
private value, then you should shift the demand curve to reflect the social value of consuming the good. (Note: MPC stands for marginal private costs,
MSC stands for marginal social costs, MPB stands for marginal private benefits, and MSB…
1. Externalities - Definition and examples
An externality arises when a firm or person engages in an activity that affects the wellbeing of a third party, yet neither pays nor receives any
compensation for that effect. If the impact on the third party is adverse, it is called a
externality.
The following graph shows the demand and supply curves for a good with this type of negative me dashed drop lines on the graph reflect the
market equilibrium price and quantity for this good.
positive
Shift one or both of the curves to reflect the presence of the externality. If the social cost of producing the good is not equal to the private cost, then
you should shift the supply curve to reflect the social costs of producing the good; similarly, if the social value of producing the good is not equal to
the private value, then you should shift the demand curve to reflect the social value of consuming the good.
PRICE (Dollars per unit)
QUANTITY (Units)
Supply
Demand
Demand
Supply
With the existence of negative externality, determine the socially efficient level of output and price.
When negative externality exists, the firms loose profits. Calculate the size of the firms’ loss.) On the other hand, the community’s gain from the social efficient allocation level. Interpret the results.
Determine the net gain (or loss) to the society.
Chapter 10 Solutions
Principles of Microeconomics
Ch. 10.1 - Prob. 1QQCh. 10.2 - Prob. 2QQCh. 10.3 - Prob. 3QQCh. 10 - Prob. 1CQQCh. 10 - Prob. 2CQQCh. 10 - Prob. 3CQQCh. 10 - Prob. 4CQQCh. 10 - Prob. 5CQQCh. 10 - Prob. 6CQQCh. 10 - Prob. 1QR
Ch. 10 - Prob. 2QRCh. 10 - Prob. 3QRCh. 10 - Prob. 4QRCh. 10 - Prob. 5QRCh. 10 - Prob. 6QRCh. 10 - Prob. 1PACh. 10 - Prob. 2PACh. 10 - Prob. 3PACh. 10 - Greater consumption of alcohol leads to more motor...Ch. 10 - Prob. 5PACh. 10 - The many identical residents of Whoville love...Ch. 10 - Prob. 7PACh. 10 - Prob. 8PACh. 10 - Prob. 9PACh. 10 - Prob. 10PA
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Similar questions
- Draw a standard supply and demand diagram for televisions, and indicate the equilibrium price and output. a. Assuming that the production of televisions generates external costs, illustrate the effect of the producers being forced to pay a tax equal to the external costs generated, and indicate the equilibrium output. b. If instead of generating external costs, television production generates external benefits, illustrate the effect of the producers being given a subsidy equal to the external benefits generated, and indicate the equilibrium output.arrow_forward(Optimal Provision of Public Goods) Using at least two individual consumers, show how the market demand curve is derived from individual demand curves (a) for a private good and (b) for a public good. Once you have derived the market demand curve in each case, introduce a market supply curve and then show the optimal level of production.arrow_forwardWith this type of externality, in the absence of government intervention, the market equilibrium quantity produced will be socially optimal quantity. Which of the following generate the type of externality previously described? Check all that apply. greater less than the A microbiology lab has published its breakthrough in swine flu research. The city where you live has turned the publicly owned land next to your house into a park, causing trash dropped by park visitors to pile up in your backyard. Alex has planted everal in his backyard that ncrease the beauty of the neighborhood, especially during the fall foliage season. Your roommate Eileen has bought a puppy that barks all day while you are trying to study economics.arrow_forward
- a. Graph the supply and demand curves, and calculate the equilibrium price and quantity. Make sure to label the y-intercepts and slopes. b. Suppose the consumption of diesel fuel creates carbon dioxide emissions that result in a negative externality of $6 per unit. Draw and label the implied social cost curve in your graph in part a, and calculate the socially optimal quantity of fuel. c. Calculate the deadweight loss associated with producing at the market equilibrium instead of the socially optimal quantity.arrow_forwardHow would I solve b,c, and darrow_forwardA set of perfectly competitive companies produce shoes. 1 pound of water pollution (WP) is released into the ocean which has a social cost of $c (per pound). The private cost of pollution is $0 when unregulated. i) Graph supply and demand curves and show the output and price of the unregulated market as well as the socially optimal output. ii) Indicate on the graph the amount of tax that would lead to the socially optimal level of production. iii) One of the companies produces Q shoes. Say there are pollution-reducing machines, K, which cost $1 each. When K = Ő machines, WP = 1 pound. With higher K, WP is lower. Give the cost-minimizing choice of WP and K when pollution is unregulated? Please explain with a diagram. iv) What would be the optimal tax rate if the government were to tax water pollution? v) When output of shoes Q is held constant, how do K and WP change when a pollution tax is instated?arrow_forward
- What tool can a government use to correct a market with a negative externality, thereby setting the efficient level of output and maximizing surplus? Show answer choices (A) Tariff (B) Quota (C) Tradable allowance (D) Subsidyarrow_forwardmake a graph that shows the marginal cost (MC), marginal revenue (MR), and marginal social benefit (MSB) curves, with and without internalization of the externality. The shaded area represents the profit.arrow_forwardWhat is the main problem associated with negative externalities? a) They lead to an overallocation of resources. b) They result in inefficiency in resource allocation. c) They encourage competitive markets. d) They have no impact on market outcomes.arrow_forward
- If the production of a good yields a negative externality, then the social-cost curve lies ________ the supply curve, and the socially optimal quantity is ________ than the equilibrium quantity. What are the fill in the blanks?arrow_forwardTo produce honey, beekeepers place hives of bees in the fields of farmers. As bees gather nectar, they pollinate the crops in the fields, increasing the yields of these fields at no additional cost to the farmer. a) Is this an externality in consumption or production? b) Is this a negative or positive externality? c) If this externality is not internalized, would beekeepers produce more or less bees than socially optimal? Why? d) Suggest a market-based solution that would internalize the externality. In your answer, give reference to the social cost and social value curves. e) What might be a reasonable private solution to this externality and how might the solution be reached?arrow_forwardProblem 1: Externality The weekly supply and demand for packs of cigarettes in the United States is given in the figure below. Suppose cigarette smoking causes an external cost on nonsmokers, as shown by the social benefit curve on the graph. Price ($) 36 34 32 30 - 28 26 - 24 22 - EMC S SEMC pvt 20 - 18- 16 - 14 - 12 - 10- 8 MB pvt social 2 MB 10 12 14 16 18 20 22 24 26 28 30 32 Pack of cigarettes (millions) a. This is a [ Select ] [ Select ] externality.arrow_forward
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