Exam 10: Externalities

Using a supply and demand diagram, demonstrate how a positive externality leads to market inefficiency. How might the government help to eliminate this inefficiency?

Table 10-2 The following table shows the private value, private cost, and social value for a market with a positive externality. -Refer to Table 10-2. What is the socially-optimal level of output in this market?

When an externality is present, the market equilibrium is

A dentist shares an office building with a radio station. The electrical current from the dentist's drill causes static in the radio broadcast, causing the radio station to lose $10,000 in profits. The radio station could put up a shield at a cost of $30,000; the dentist could buy a new drill that causes less interference for $6,000. Either would restore the radio station's lost profits. What is the economically efficient outcome?

In some circumstances, selling pollution permits may be better than levying a corrective tax.

A corrective tax is also known as:

In some situations, private economic actors cannot solve the problem of externalities among themselves because of substantial costs.

An externality arises when a person engages in an activity that influences the well-being of

Karen's cat causes Danny to sneeze. Karen values her cat's companionship at $300 per year. The cost to Danny of tissues and her allergy medication is $350 per year. Based on the Coase theorem,

An example of a private solution to externalities is charities. The government encourages this private solution by allowing .

A corrective tax

When the government intervenes in markets with externalities, it does so in order to

Figure 10-4 -Refer to Figure 10-4. If this market is currently producing at Q2, then total economic well-being would increase if output

According to the Coase theorem, whatever the initial distribution of rights, the interested parties can bargain to an efficient outcome.

Figure 10-4 -Refer to Figure 10-4. This market

When we identify public policies toward externalities, we contrast command-and-control policies with what other type of policies?

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?

Figure 10-9 -Refer to Figure 10-9, Panel c). The market equilibrium price is

Figure 10-15 -Refer to Figure 10-15. The supply of pollution permits is

Figure 10-16 -Refer to Figure 10-16. This graph shows the market for pollution when permits are issued to firms and traded in the marketplace. In the absence of a pollution permit system, the quantity of pollution would be