Economics: Private and Public Choice (MindTap Course List)
16th Edition
ISBN: 9781305506725
Author: James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher: Cengage Learning
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Chapter 5, Problem 10CQ
To determine
Define external cost and when it will be present.
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When does inefficiency exist in an economy?
when a good is distributed fairly among buyers
when a good is not distributed fairly among buyers
when a good is not being produced by the lowest-cost producers
when a good is being consumed by buyers who value it most highly
Define negative and positive externalities and their effect on resource allocation.
Use the following diagram of the market for product X to answer the question below.
Price
Q₁ Qo Q₂
Quantity
D₁
Curve S, embodies all costs (including externalities) and D, embodies all benefits
(including externalities) associated with the production and consumption of X.
Assuming the market equilibrium output is Q₁, we can conclude that the existence of
external
A) costs has resulted in an underallocation of resources to X.
B) costs has resulted in an overallocation of resources to X.
C) benefits has resulted in an overallocation of resources to X.
D) benefits has resulted in an underallocation of resources to X.
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Economics: Private and Public Choice (MindTap Course List)
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- Explain the difference between a positive externality and a negative externality. Can both types of externalities result in market failure? Why or why not?arrow_forwardPlease answer correctly and only typed answerarrow_forwardSuppose that there is an unregulated market for pesticides. When the factories produce pesticide, they also create waste that they dump into a lake on the outskirts of town. The market for pesticides is given by the following equations (note that Q is in tons, and P is in 1000s of dollars: Demand: P = 8 – Q Supply: P = Q Marginal Social Cost: P = 2 + Q Now suppose the government levies a pollution tax. What is the tax per ton of pesticide that will achieve the socially efficient outcome? If the production of pesticides at any level produces pollution, why is the socially optimal quantity not zero?arrow_forward
- 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 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 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 drag 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 drag the demand curve to reflect the social value of consuming the good. (?) PRICE (Dollars per unit) QUANTITY (Units) Supply Demand ¦ þ Demand Supplyarrow_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_forwardHow large should a Pigovian tax be to achieve efficiency?arrow_forward
- Consider a situation in which two countries, Home and Foreign, can produce a good that is subject to external economies of scale. Assume that firms in both countries face the same average costs curve (AC), given by: AC = m + r/(s+q) where m=3, r=20, s=2 and Q indicates quantity. The demand curves are given by, respectively: Q= b - P for Home and, Q = b* - P for Foreign, where b=20 and b*=40 . Q indicates quantity and P indicates price. Answer the following questions: Plot the AC curve and the demand curve for both Home and Foreign in the same graph (put quantity in the x-axis and price and cost in the y-axis. (Please do not use python to plot the graph and would appreciate a picture of the graph). Assume that both countries are closed to international trade. Compute the equilibrium price and quantity in both countries. Assume that these two countries open to trade with each other. Which country will produce the good? Explain why. What are the benefits of international trade…arrow_forwardSuppose the supply curve of motorized scooter rentals in Golden Gate Park is given by: P = 5 + 0.1Q, where P is the daily rent per unit in dollars and Q is the volume of units rented in hundreds per day. The demand curve for motorized scooters is: P=20 -0.2Q. If each motorized scooter imposes $2.10 per day in noise costs on others, by how much will the equilibrium number of motorized scooters rented exceed the socially optimal number? units (in hundreds).arrow_forwardAssume a perfectly competitive market with no externalities. The demand curve is P =52 - 0.06×Qd. The supply curve is P =0.06×Qs. In equilibrium, what is total surplus?arrow_forward
- why do externalities make market outcomes inefficient?arrow_forwardThe graph shows the marginal cost of abatement curve, which shows the extra cost to the firm of cleaning up an additional unit of pollution. When a pollution charge of $5 per unit emitted is imposed, how many units of pollution will the firm choose to clean up? units of pollution cleaned up: When a pollution tax of $20 per unit emitted is imposed, how many units of pollution will the firm choose to clean up? units of pollution cleaned up:arrow_forwardAn 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 externality. The dashed drop lines on the graph reflect the market equilibrium price and quantity for this good. Adjust one or both of the curves to refiect the presence of the externality. If the social cost of producing the good is not equal to the private cost, then you should drag 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 drag the demand curve to reflect the social value of consuming the good. -O- Supply Demand Supply Demand QUANTITY (Unts) With this type of externality, in the absence of government intervention, the market…arrow_forward
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