Deck 16: Externalities, Public Goods, and Social Choice

Question 1

Assume a company has a cafeteria where it lets all its workers eat without making them pay up front. Instead, at the end of the month the total cost of eating at the company cafeteria is added up and divided by the total number of workers. This amount is then deducted from each worker's paycheck. Explain how this practice may lead to a negative externality.

Answer 1

Since each person faces a marginal cost of zero of dining of zero. This will lead many workers to eat more than they otherwise would if they faced the true cost of their meals. This could result in many of the workers overeating that may make for a less healthy workforce.

Question 2

Oscar and Felix room together in an apartment in New York City. Oscar is very messy and Felix is obsessed with neatness. Felix cannot stand a messy apartment and is even willing to pay Oscar $50 per week for him to clean up after himself. Oscar hates to clean up so much that he is willing to pay Felix $30 per week to maintain his messy habits. If Felix has the right to a clean apartment explain why the apartment will be clean. If Oscar has the right to remain messy explain why the apartment will still be clean.

Answer 2

In either case the apartment will remain clean. If Felix has the right to cleanliness, Oscar may offer $40 but the offer is likely to be refused because he values cleanliness at $50. If Oscar has the right to be messy he will be willing to accept some payment between $30 and $50 from Felix to clean up after himself.

Question 3

Comment on the following statement: "Taxes on externality-producing activities are generally used to eliminate externalities."

Answer 3

The statement is false. Taxes are used to force decision makers to consider the full costs of their actions. This does not mean that the decision maker will decide to stop the externality-producing activity but he will generally scale back the activity.

Question 4

What is marginal social cost?

Question 5

What does it mean to internalize an externality?

Question 6

XYZ Corporation operates in a perfectly competitive market and is currently maximizing profit. To keep the firm's costs low, XYZ's managers have decided to dump waste in a nearby river. Explain why the level of output currently produced by XYZ is not efficient.

Question 7

List four sources of market failure.

Question 8

What is marginal damage cost?

Question 9

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.

Question 10

What is marginal private cost?

Question 11

What is market failure?

Question 12

Give an example where a government subsidy can correct an externality. Explain how the subsidy would lead to a more efficient outcome.

Question 13

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?

Question 14

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

Question 15

Use a graph to explain how a tax can provide an incentive for a firm to produce a more efficient level of output.

Question 16

What is the largest problem associated with using a tax to correct for an externality? Explain.

Question 17

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

Question 18

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

Question 19

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

Question 20

Critically evaluate the following statement. "Automobile manufacturers continue to produce cars that are dangerous. Therefore the industry should be considered as a market failure and safety mandates should be imposed by the government to insure that all cars are completely safe."

Question 21

What do you believe is one of the chief criticisms of the Coase Theorem that render it useless in real-world situations.

Question 22

Comment on the following statement: "The Coase theorem implies that the contending parties will come to the efficient solution regardless of where rights are initially assigned."

Question 23

How does the selling of pollution rights lead to a more efficient outcome?

Question 24

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.

Question 25

Dick has a dog (Spot) that likes to bark at night. Jane, who lives next door to Dick, must be at work every morning by six o'clock. Suppose that there is a noise ordinance that requires Dick to keep his dog quiet. Is there any Coase solution to this problem that does not involve calling the police? Explain.

Question 26

Why do you suppose that taxes are often used in place of effluent charges in order to combat pollution?

Question 27

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?

Question 28

What is the Coase theorem?

Question 29

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.

Question 30

Why does the absence of well-defined property rights serve as a stumbling block for the application of the Coase theorem?

Question 31

What are liability rules?

Question 32

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

Question 33

In what way can liability rules lead to a more efficient outcome?

Question 34

What is a public good?

Question 35

Economists often refer to taxes, subsidies, legal rules, and public auctions as methods of indirect regulation. Explain what this means and what are its limitations.

Question 36

What three conditions must be satisfied in order for the Coase theorem to work?

Question 37

How do taxes work to reduce a negative externality? Explain in detail.

Question 38

What is an injunction?

Question 39

Dick has a dog (Spot) that likes to bark at night. Jane, who lives next door to Dick, must be at work every morning by six o'clock. Suppose that there is no noise ordinance that requires Dick to keep his dog quiet. Is there any Coase solution to this problem? Explain.

Question 40

Fred enjoys smoking cigars, but his wife Wilma feels ill whenever she is around cigar smoke. Use the Coase theorem to explain how this problem could be solved without government involvement.

Question 41

Why are public goods a source of market failure?

Question 42

What is the free-rider problem?

Question 43

How is the market demand for public goods derived?

Question 44

What is the drop-in-the-bucket problem?

Question 45

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

Question 46

Some states require that unions represent non-union workers who don't pay dues in their collective bargaining negotiations. Explain using economic logic how this might result in fewer unions than would otherwise be the case if these types of laws did not exist.

Question 47

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.

Question 48

Explain why cable television is not a pure private good.

Question 49

Explain why a freeway isn't always considered to be a pure public good.

Question 50

Give an example of a public good. Explain what characteristics make this good a public good.

Question 51

What does it mean for a good to be non-rival in consumption?

Question 52

What does it mean for a good to be nonexcludable?

Question 53

The online encyclopedia known as Wikipedia is an example of a public good that provides information. Explain why this good did not need to be provided by the government.

Question 54

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.