Exam 10: Externalities

To produce honey, beekeepers place hives of bees in the fields of farmers. As bees gather nectar, they pollinate the crops in the fields, which increases the yields of these fields at no additional cost to the farmer. What might be a reasonable private solution to this externality, and how might the solution be reached?

Scenario 10-1 The demand curve for gasoline slopes downward and the supply curve for gasoline slopes upward. The production of the 400th gallon of gasoline entails the following: a private cost of $2.83; a social cost of $3.12; a value to consumers of $3.23. -Refer to Scenario 10-1. Let Q represent the number of gallons of gasoline and let P represent the price of a gallon of gasoline. Which of the following statements is correct?

Which of the following statements is not correct?

In a market with positive externalities, the market equilibrium quantity maximizes the welfare of society as a whole.

Use a graph to illustrate the quantity of pollution that would be emitted (a) after a corrective tax has been imposed and (b) after tradable pollution permits have been imposed. Could these two quantities ever be equivalent?

Suppose that Company A's railroad cars pass through Farmer B's corn fields. The railroad causes an externality to the farmer because the railroad cars emit sparks that cause $1,500 in damage to the farmer's crops. There is a special soy-based grease that the railroad could purchase that would eliminate the damaging sparks. The grease costs $1,200. Suppose that the farmer has the right to compensation for any damage that his crops suffer. Assume that there are no transaction costs. Which of the following characterizes the efficient outcome?

Assume each college degree that is granted conveys an external benefit of $3,500. The granting of the 500^th college degree entails a private cost of $15,000 and a private value of $25,000. What is the social value of the 500^th college degree?

Figure 10-3 -Refer to Figure 10-3. What is the equilibrium price in this market?

Barking dogs cannot be considered an externality because externalities must be associated with some form of market exchange.

Figure 10-4 -Refer to Figure 10-4, Graph (b) and Graph (c). The installation of a scrubber in a smokestack reduces the emission of harmful chemicals from the smokestack. Therefore, the socially optimal quantity of smokestack scrubbers is represented by point

The government can internalize externalities by taxing goods that have negative externalities and subsidizing goods that have positive externalities.

Table 10-3 ​ ​ Quantity (Units) Private Value (Dollars) Private Cost (Dollars) External Benefit (Dollars) 1 22 12 10 2 20 15 10 3 18 18 10 4 16 21 10 5 14 24 10 6 12 27 10 -Refer to Table 10-3. The socially optimal quantity of output is

Sheryl sits on her patio and plays her guitar while her neighbors are outside. Sheryl neither pays nor receives any compensation for playing her guitar. Under what condition does her guitar-playing give rise to a positive externality?

Firms that can reduce pollution easily would be willing to sell their pollution permits.

According to the Coase theorem, the private market will need government intervention in order to reach an efficient outcome.

According to the Coase theorem, if private parties can bargain without cost, then the private market will solve the problem of externalities.

Figure 10-5 -Refer to Figure 10-5. A benevolent social planner would prefer

Suppose a certain good provides an external benefit. If the private cost of the last unit of the good that was produced is equal to the social value of that unit, then the sum of producer and consumer surplus is maximized.

Organizers of an outdoor concert in a park surrounded by residential neighborhoods are likely to consider the noise and traffic cost to residential neighborhoods when they assess the financial viability of the concert venture.

If the production of computer chips yields greater technology spillovers than the production of potato chips, the government should