Question 1

If K-12 education is determined to be an inframarginal positive externality,this means that K-12 education is being underproduced.

Accepted Answer

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Question 2

Explain the difference between a technological and pecuniary externality.What are the public policy implications of both types of externalities? Explain your reasoning.

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Question 3

A regional airport decides to extend a runway,increasing the amount of noise pollution on nearby homes.Assume that an optimal corrective tax can be applied.Should that tax be paid as compensation to the nearby homeowners? How might compensating the homeowners change their (and potentially others)incentives?

Accepted Answer

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Question 4

For the affected individuals,pecuniary externalities can be as harmful as technological externalities.

Accepted Answer

Pecuniary externalities refer to the effects of market prices on individuals or firms not directly involved in a market transaction. These externalities can result in economic harm for affected individuals, just like technological externalities. Therefore, the statement is true.

Question 5

Suppose that a factory is located on the outskirts of a small town.As a by-product of its production process,it produces sulfur dioxide that gets released into the air.The sulfur dioxide lowers the quality of the in the town.Suggest some possible remedies for this negative externality.

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Question 6

Draw a negative externality.Clearly label the axis and the equilibrium that would occur were there no external costs and the equilibrium with external costs.Explain the diagram and the resulting problem that negative externalities create from the standpoint of economic efficiency.

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Question 7

An excess benefit from corrective taxation arises because the tax revenues can be spent on compensation.

Accepted Answer

An excess benefit from corrective taxation primarily arises because it corrects for externalities, not because the tax revenues can be spent on compensation.

Question 8

If the government subsidizes an activity it believes is generates a positive externality and it really only produces an inframarginal positive externality then the subsidization will result in an overproduction of the activity in question.

Accepted Answer

If the positive externality is only inframarginal, then the costs of the additional units produced will exceed the benefits. By subsidizing the activity, the government lowers the cost of production and encourages more output, leading to an overproduction of the activity and a misallocation of resources.

Question 9

Draw the demand and supply curve for a good with an inframarginal external benefit.Clearly label the axis and equilibrium point.Using your graph,describe why the equilibrium level of output is efficient.

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Quiz 4: Externalities