Exam 16: Externalities, Public Goods, and Social Choice

Explain why imperfect information can lead to market failure. Explain how the market can solve the problem of imperfect information. Under what circumstances may it be more efficient for the government to produce information instead of relying on the market?

In an effort to clean up the amount of sulfates introduced into the atmosphere the government has ruled that all polluters install smoke stack scrubbers on their smoke stacks and mandated a pollution limit on the amount of sulfates per parts of air that may be legally emitted into the atmosphere. Suppose some of the polluters have found a more efficient way to eliminate the pollution. How will this discovery change the amount of sulfates emitted into the atmosphere?

Provide an economic explanation for why government subsidization of child immunizations may lead to a more efficient outcome.

Explain the Coase theorem. In order for the Coase theorem to be applicable, explain which three conditions must be satisfied. Give an example to show how the Coase theorem can be applied.

Fred enjoys smoking cigars, but cigar smoke makes his wife, Wilma, feel ill. Use a graph to show that Fred's consumption of cigars will be inefficient if he ignores the costs imposed on Wilma.

What are liability rules?

What is marginal damage cost?

What is the free-rider problem?

What is the optimal level of provision of a public good?

Consider a large public university in which a chemistry lecture is usually attended by 300 students or so but with large amounts of available seats on any given day. Is this a pure public good? If not, why not? Is this good likely to be provided in an efficient manner if the professor is vigilant in making sure that only registered students attend? Explain.

Define marginal social cost. Draw a graph for a perfectly competitive firm that creates an external cost without considering this external cost in its decision making. The graph should include the firm's demand curve, marginal cost curve, and marginal social cost curve. On the graph, indicate the amount this firm will produce to maximize profits and the efficient level of output. If the government imposes a tax on this firm to force the firm to internalize the externality, indicate on the graph the correct amount of the tax. Explain the results of this tax. Explain why this solution may be difficult to implement.

List the five approaches used to solve the problem of externalities.

Comment on the following statement. "Taxing externality-producing activities may not eliminate damages."

Use a graph to explain why a perfectly competitive firm will overproduce if a negative externality is present.

List four sources of market failure.

Why are public goods a source of market failure?

What is market failure?

Why would a firm continue to pollute even when it is fined (taxed) for doing so?

What is marginal social cost?

The figures below represent the demand for a public good for two consumers, Tom and Jerry. Assuming that these are the only two buyers, draw a graph showing the market demand curve for this public good.