Econ Ch. 18

Having a loud party in an apartment building will create ___________ to neighbors who are not invited to the party and therefore ___________.

People who recycle most of their waste generate __________, because the people who recycle ____________.

negative externality

the person who hosts the party is the economic decision maker

positive externalities

are not the only ones who receive the benefits

In considering the decision to adopt a dog, indicate which of the following is an example of a private cost, a private benefit, an external cost, and an external benefit that may result from the decision:

The food for the dog is: ________________

The dog discouraging intruders and trespassers from the neighborhood is _______________.

The enjoyment from a new companion is _____________.

Barking disturbing the neighbors' sleep is ______________.

private cost

external benefit

private benefit

external cost

Which of the following is an example of a private cost, a private benefit, an external cost, and an external benefit that may result from smoking cigarettes?

Second-hand smoke is ____________.

Any desirable effect of nicotine is ____________.

The price of the cigarettes is ____________.

If smokers paid the social cost of cigarettes, smoking would ____________.

external cost

private benefit

private cost

decrease

When U.S. farmers in the Southwest irrigate their land, salt in the ground soil leaks into the Colorado River. The Colorado River has become so salty that Mexican farmers further down the river cannot irrigate their own land and Mexican crops have been devastated. This situation constitutes a negative externality because: ________________.

If U.S. farmers were to internalize this externality, U.S. farmers would irrigate __________ as the ______________.

U.S. farmers consider only their private costs in their decision making

less

private cost would increase

If education has private benefits to an individual as well as external benefits to society, which of the following explains why a less-than-optimal amount of education occurs?

The decision makers usually only consider private benefits and private costs.

Hand washing has external health benefits, helping prevent the spread of communicable diseases. If a program were somehow devised so that people received a small reward every time they washed their hands, we would expect the frequency of hand washing to _______________ and the number of people who are sick to _______________.

increase

decrease

Joan loves turning up her electric guitar amp all the way, but her next-door neighbor hates listening to her. Which of the following private solution to their problem is most likely to be sustainable in the long run?

Joan's neighbor pays Joan at the end of each month as long as Joan has kept the noise down all month.

Felix and Oscar are roommates. Oscar is messy and Felix plans to move out unless they can come to an agreement. The roommates can only reach a private solution if Oscar compensates Felix for being messy.

False

Explanation:

It does not matter whether Oscar compensates Felix for being messy or Felix pays Oscar to clean up. Either approach could resolve the problem as long as the cost savings from living together exceeds the cost of the private solution for the person compensating the other and as long as the private solution is enforceable.

Suppose that you are an economic-policy advisor. Environmental groups are pressuring you to implement the highest-possible carbon tax while industry groups are pressuring you to implement no carbon tax at all. Both argue that their position makes more sense economically. In fact, the most efficient tax level is:

a tax equal to the external cost.

A tax will make a market less efficient if ____________________, but more efficient if __________________.

No externalities exist

Negative externalities exist

The city of Seattle limits each household to one can of free garbage collection per week. There are fees for any extra garbage collected from the curb. This type of quota policy is ____________ efficient way of reducing waste than charging a set price per can because:

a less

the marginal benefit of having a can of garbage collected varies among households.

Suppose an environmental impact study shows that the coral reef near Port Douglas, Australia, can sustain 18 scuba diving tours per week. Using a quota of 18 dive tours per week will have the following advantage over a tax:

The quota will better ensure that the sustainable amount of dives will occur.

The city of Seattle limits each household to one can of free garbage collection per week. There are fees for any extra garbage collected from the curb. Suppose that a neighborhood group in Seattle organizes a group of families so that those who plan to go over their one-can garbage quota can find households that are under their quota and pay them to put out the extra trash.

The policy will ____________ efficiency.

increase

Suppose the government is considering two policies to limit factory air pollution: taxing all producers, or providing each producer with an allotment of tradable permits. If both policies lead to the same amount of pollution reduction, who of the following is least likely to benefit from the tradable-permit option?

The government

You are considering whether to enter a holiday lights display contest that pays $1,000 to the winner. State whether each of the following constitutes private costs, private benefits, external costs, or external benefits.

a. Increased traffic congestion

b. Increased electric bill from the holiday lights

c. Winning the holiday lights display contest

d. Neighbors have difficulty parking on your street

a. private cost, external cost

b. private cost, external benefit

c. private benefit

d. private cost, external cost

The figure below shows the demand curve for a U.S. farmer for irrigating his land. It costs $100 per acre to irrigate the land. Each acre of land irrigation generates salty runoff that winds up in the Colorado River. It costs $50 to desalinate this river water so Mexican farmers can irrigate their crops.

(MBpvt = MBsocial = (0, $250) (100, $0))

a. Draw the marginal private cost of irrigation on the graph.

b. Draw the marginal social cost of irrigation on the graph.

c. A U.S. farmer will irrigate: __________ acres.

d. The efficient level of irrigation is: __________ acres

a. MCpvt points = (0, $100) (100, $100)

b. MCsocial points = (0, $150) (100, $150)

c. 60

d. 40

The weekly supply and demand for packs of cigarettes in the United States is given in the figure below.

(MCpvt = MCsocial = (0, $8) (30, $24))

(MBpvt points = (0, $30) (30, $0))

a. Suppose cigarette smoking causes a $6 per pack external cost on nonsmokers. Draw the social benefit curve that accounts for the external cost associated with smoking.

b. Assuming the externality associated with smoking is not faced by consumers, ____________ million packs of cigarettes are consumed per week.

c. The efficient number of cigarette packs is: __________ million packs.

a. MBsocial points = (0, $24) (24, $0)

b. 14

c. 10

The figure below shows supply and demand for first-aid training, based on private costs and benefits.

(MCpvt = MCsocial = (0, $8) (30, $24))

(MBpvt points = (0, $24) (24, $0))

a. Suppose that the external benefit from first-aid training is worth $6. Graph the social benefit curve for first-aid training that accounts for the external benefit.

b. Ignoring the social benefits of first-aid training, _____________ hours of training will occur.

c. The socially optimal quantity of first-aid training is: _____________ hours.

d. Graph the deadweight loss that occurs when consumers are unable to capture the $6 external benefit they provide from first-aid training.

The deadweight loss when consumers are unable to capture the $6 external benefit they provide from first-aid training is: $_____________.

a. MBsocial points = (0, $30) (30, $0)

b. $10

c. $14

d. Deadweight points = (10, $20) (10, $14) (14, $16)

$12

The figure below shows supply and demand for planting trees, based on private costs and benefits. Trees sequester carbon, meaning that they help counteract pollutants that contribute to climate change.

(MBpvt = MBsocial = (0, $16) (80, $0))

(MCpvt points = (0, $4) (80, $20))

a. Suppose that the carbon sequestration that results from planting a tree is worth $4. Graph the social cost curve that accounts for the positive externality of trees.

b. Ignoring the positive externality, ___________ trees will be planted.

c. The socially optimal quantity of trees is: _____________ trees.

d. Graph the deadweight loss that occurs when suppliers are unable to capture the $4 external benefit they provide from planting trees.

The deadweight loss when suppliers are unable to capture the $4 external benefit they provide from planting trees is: $____________.

a. MCsocial points = (0, $0) (80, $16)

b. 30

c. 40

d. Deadweight loss points = (30, $10) (30, $6) (40, $8)

$20

Your neighbor never mows his lawn. You don't have any legal right to force him to mow, but the mess in his front yard is making your neighborhood unsightly and reducing the value of your house. The reduction in the value of your house is $5,000, and the value of his time to mow the lawn once a week is $1,000. Suppose you offer him a deal in which you pay him $3,000 to mow. How does this deal affect surplus?

The deal increases both your surplus and your neighbor's.

Johnston Forest in Rhode Island has a cave that houses thousands of fruit bats. Bat droppings are highly acidic and have ruined the paint on many Rhode Island cars. The flying radius of the Johnston Forest bats encompasses two towns, Johnston and Foster. The residents of Johnston collectively value bat removal at $400,000. Foster residents collectively value bat removal at $500,000. Pest control experts estimate that the cost of bat removal would be $450,000. Which of the following scenarios would lead to removal of the bats? Check all that apply.

(All correct)

Foster pays Johnston $50,000 to contribute to bat removal.

Foster and Johnston evenly split the cost of bat removal.

Johnston contributes nothing toward bat removal.

The local government has decided that because children's health has large external benefits, it will offer a subsidy to help families pay for visits to the pediatrician. However, the government isn't sure at what level to set the subsidy. The figure below shows the current demand curve for pediatrician visits (MBprivate) and three alternative subsidies, represented by curves Dsubsidy = $30, Dsubsidy = $60, and Dsubsidy = $90.

a. Assume that the correct level of subsidy is $60. The socially optimal level of pediatrician visits is: ___________ visits.

b. Compared to the efficient outcome, graph the deadweight loss that would result from subsidies of $30 or $90.

a. 350

The figure below shows the daily market for water skiing permits on El Dorado Lake. Suppose each skier (each permit) causes $4 of damage to the lake.

a. Draw the social benefit curve that accounts for the external cost of skiers, and draw the deadweight loss that occurs when consumers are unable to internalize the $4 external cost they cause from skiing.

The socially optimal level of water skiing is _________ permits.

If there is no government intervention in this market, the deadweight loss is $___________.

b. Suppose the government imposes an $8 tax on buyers of ski permits. Draw the after-tax demand curve.

The $8 tax is ___________. Draw the deadweight loss associated with this tax.

The deadweight loss is: $ ___________.

c. Compared to no intervention, ________________

a. 30

$20

b. too high

$20

c. the tax did not change total surplus

Suppose certain fireworks are legal in a residential area on the Fourth of July. The fireworks have been approved for safety, but they do cause noise pollution so their use must be limited. Jenny and Salo like to purchase fireworks for their families; the table below shows each individual's willingness to pay for fireworks. The price of fireworks is $2 per firework.

a. If a quota of 30 fireworks per person is imposed, Jenny is willing to pay $ ________________ for her last firework.

Salo is willing to pay $ ____________ for his last firework.

b. If the government wants no more than 60 total fireworks to be purchased, a tax of $ ________________ should be imposed. (Note that the supply curve is perfectly elastic such that the full burden of the tax will fall on consumers.)

Under this tax, Jenny will purchase __________ fireworks and Salo will purchase ______________ fireworks.

a. $7

$4

b. $4

40

20

Many municipalities are concerned about the environmental impact of plastic bags, which often end up as litter, clogging drains, and hanging from tree branches. A town is considering whether to impose a tax on plastic bags to be collected at the store or a per person quota. Cindy and Carl are two average citizens who both use plastic bags when they go grocery shopping. Plastic bags are currently free when they shop. The figures below show each individual's demand curve for plastic bags.

a. Under the quota, the willingness to pay for the last bag used for Cindy is $____________ and for Carl, $ ____________.

b. Under the tax, Cindy will use ____________ bags and Carl will use ____________ bags.

The willingness to pay for the last bag used for Cindy is $ ____________ and for Carl, $ ____________.

c. The town should adopt a: ____________.

a. $0.60

$0.30

b. 30

10

$0.40

$0.40

c. plastic-bag tax, because it achieves the same outcome in terms of the number of bags but does so more efficiently.