Economics: Private and Public Choice
16th Edition
ISBN: 9781337642224
Author: James D. Gwartney; Richard L. Stroup; Russell S. Sobel
Publisher: Cengage Learning US
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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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- 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_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_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_forward
- Assume 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_forwardwhy 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 $20 per unit emitted is imposed, how many units of pollution will the firm choose to clean up? units of pollution cleaned up:arrow_forward
- Consider a situation in which two countries, Home and Foreign, can produce a good that is subject to external economies of scale. Assume that firms in both countries face the same average costs curve (AC), given by: AC=m-rQ where m=21, r=0.5, and Q indicates quantity. The demand curves are given by, respectively: Q = 6 - P for Home and Q = 6*1P for Foreign, where b=10, b*=13, and h=10. Q indicates quantity and Pindicates price. Answer the following questions: Assume that the countries are closed to international trade but they are considering a trade agreement. If the countries open to trade, which country will produce the good? Plot the cost and demand curves in a graph and use the graph to rationalize your answer. [HINT: use the functional forms given in the problem to draw your graph, and put quantity in the x-axis and price and cost in the y-axis.] b. The government of the country that may lose the industry anticipates the outcome in a) and decides to introduce a subsidy to the…arrow_forwardDraw a graph with pollution abatement on the horizontal axis (assume a firm can remove up to 100 tons of pollution) and dollars ($) on the vertical axis. Draw one firm's marginal abatement cost curve (MC). Say a pollution tax is imposed on the firm. a. What are the costs the firm would incur if they chose to not reduce pollution at all? b. Is there a different level of pollution abatement the firm could choose that would result in lower costs? c. Label that level of abatement A* on your graph and shade in the area that represents the cost-savings as compared to when they polluted 100 tons (did no abatement)arrow_forwardThe following table shows how the marginal benefit enjoyed by John, Mary, Loren, and all other consumers of outdoor rock concerts varies with the number made available by a city government per summer. a) What would be the efficient number of concerts to produce if the marginal cost of production were $425 instead of $1,000? b) Suppose the marginal cost of producing rock concerts is only $250 per concert no matter how many are produced. Use the data to calculate the efficient number of concerts. c) If a Lindahl scheme is used to finance the concerts, what prices of admission should be charged to John, Loren, and Mary?arrow_forward
- The question is in the screenshots attached. It's part of some practice questions in my online textbook.arrow_forwardWhat are the necessary conditions for economic efficiency? In what four situations might a market fail to achieve ideal economic efficiency?arrow_forwardImagine a firm's marginal abatement cost function with existing technologies is: MAC = 12 – E. If the firm adopts new pollution abatement technologies, its marginal abatement cost function will be: MAC = 6 – 0.5E. The adoption costs for the new technology are $6. If the government raises the tax on emissions from $1 to $4, the benefits of adopting the new technologies increase by $. Select one: a. $7.50. O b. $12. C. $3. O d. $4.5.arrow_forward
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