Externalities 2719
4. 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?
5. Does the restoration of historic buildings create a positive externality or does it create a negative
externality?
6. Briefly explain how research into new technologies gives rise to a positive externality.
2720 Externalities
7. At any given quantity, the willingness to pay of the marginal buyer is the height of the .
8. At any given quantity, the cost of the marginal seller is the height of the .
Scenario 10-2
The demand curve for restored historic buildings slopes downward and the supply curve for
restored historic buildings slopes upward. The production of the 50th restored historic building
entails the following:
• a private cost of $800,000;
• a private value of $650,000;
• a social value of $800,000.
9. Refer to Scenario 10-2. Is there an externality associated with this market? If your answer is
“Yes,” is the externality positive or negative?
Externalities 2721
10. Refer to Scenario 10-2. Is there an external cost associated with the restoration of the 50th
historic building, or is there an external benefit? What is the amount of that external cost or
external benefit?
11. Refer to Scenario 10-2. Is the market equilibrium quantity of restored historic buildings less
than, equal to, or greater than 50?
12. Refer to Scenario 10-2. Is the socially optimal quantity of restored historic buildings less than,
equal to, or greater than 50?
2722 Externalities
13. Refer to Scenario 10-2. Could the government impose a tax or provide a subsidy to move the
market to the social optimum? If your answer is “Yes,” should it be a tax or should it be a
subsidy?
Scenario 10-3
Suppose the equation for the demand curve in a market is
where is the quantity demanded and is the price.
Also, suppose the equation for the supply curve in the same market is ,
where is the quantity supplied.
14. Refer to Scenario 10-3. What are the market equilibrium quantity and price?
Externalities 2723
15. Refer to Scenario 10-3. Suppose there is an external cost of $12 associated with the production
of each unit of the good. What particular tax or subsidy would move the market to the social
optimum?
16. Refer to Scenario 10-3. Suppose there is an external cost of $12 associated with the production
of each unit of the good. What is the equation of the social-cost curve?
17. Refer to Scenario 10-3. Suppose there is an external cost of $12 associated with the production
of each unit of the good. What is the social cost of producing 30 units of the good?
2724 Externalities
18. Refer to Scenario 10-3. Suppose there is an external cost of $12 associated with the production
of each unit of the good. What are the socially optimal quantity and price?
19. Suppose the market-equilibrium quantity of good x is larger than the socially-optimal quantity of
good x. Does the production of good x convey a positive externality or does it convey a negative
externality?
20. Suppose the socially-optimal quantity of good x is larger than the market-equilibrium quantity of
good x. Does the production of good x convey a positive externality or does it convey a negative
externality?
Externalities 2725
21. Suppose a tax is imposed on producers of aluminum as a means of internalizing the externality
associated with aluminum production. If the tax accurately reflects the external costs of pollutants
released into the atmosphere, then the new supply curve for aluminum coincides with which other
curve?
22. Suppose a subsidy is offered to consumers of education as a means of internalizing the
externalities associated with education. If the subsidy accurately reflects the external benefits of
education, then the new demand curve for education coincides with which other curve?
23. Assume each gallon of gasoline that is produced gives rise to an external cost of $1.25. On any
given day, the production of the 10,000th gallon of gasoline entails a private value of $4.00 and a
social cost of $3.50. What is the private cost of the 10,000th gallon?
2726 Externalities
24. Assume each college degree that is granted conveys an external benefit of $3,500. The granting
of the 500th college degree entails a private cost of $15,000 and a private value of $25,000. What
is the social value of the 500th college degree?
Scenario 10-4
The demand curve for fire extinguishers slopes downward and the supply curve for fire
extinguishers slopes upward. The production of the 500th fire extinguisher entails the following:
• a private cost of $10;
• an external cost of $0;
• a private value of $9;
• an external benefit of $3.
•
25. Refer to Scenario 10–4. Does the production of fire extinguishers convey a positive externality,
a negative externality, or neither?
Externalities 2727
26. Refer to Scenario 10-4. What is the social value of the 500th fire extinguisher?
27. Refer to Scenario 10-4. In order to reach the social optimum, should fire extinguishers be taxed
or subsidized? What is the appropriate amount of the tax or subsidy on each fire extinguisher?
28. Refer to Scenario 10-4. Is the market-equilibrium quantity of fire extinguishers less than, equal
to, or greater than 500? Explain.
2728 Externalities
29. Refer to Scenario 10-4. Is the socially-optimal quantity of fire extinguishers less than, equal to,
or greater than 500? Explain.
30. Refer to Scenario 10-4. In order to maximize the total benefit of fire extinguishers to society as
a whole, should the number of fire extinguishers produced be less than, equal to, or greater than
500? Explain.
31. When we identify public policies toward externalities, we contrast command-and-control
policies with what other type of policies?
Externalities 2729
32. Some policies toward externalities provide incentives so that private decision makers will choose
to solve the problem on their own. What name do we use for these types of policies?
33. As a means of dealing with pollution, do economists generally prefer corrective taxes or do they
prefer regulations?
34. Suppose the Environmental Protection Agency issues pollution permits in order to limit the quantity
of pollution.
Under this policy, is the supply of pollution rights perfectly elastic or is it perfectly inelastic?
2730 Externalities
35. What are the three externalities that are associated with driving cars and trucks?
36. A former senator remarked that “We cannot give anyone the option of polluting for a fee.” Do
most economists agree with this statement, or do they disagree with it?
37. Suppose a new market for tradable pollution permits is created. As long as there is a free market
for the pollution rights, the final allocation will be , regardless of the initial allocation of permits.
38. Suppose the Environmental Protection Agency uses a corrective tax to set a price for pollution.
Under this policy, is the supply curve for pollution rights vertical or is it horizontal?
Externalities 2731
39. Some government policies provide incentives for private decision makers to choose to solve the
problem of externalities on their own. What term do we use to describe such policies?
40. Suppose a Pigovian tax is imposed on a market that is characterized by one or more externalities.
Is this a command– and-control policy or is it a market–based policy?
41. The Environmental Protection Agency (EPA) requires that firms in a certain industry adopt a
particular technology to reduce the emission of pollutants. Is this requirement a command- and–
control policy or is it a market-based policy?
2732 Externalities
42. Describe the circumstances under which it would be better for the government to sell pollution
permits than to levy a corrective tax.
43. Suppose the government levies a corrective tax on firms that pollute in order to limit the quantity
of pollution. Under this policy, does the demand curve for pollution rights determine the quantity
of pollution, or does it determine the price of pollution?
44. Suppose the government issues a limited number of pollution permits in order to limit the quantity
of pollution. Under this policy, does the demand curve for pollution rights determine the quantity of
pollution, or does it determine the price of pollution?
Externalities 2733
45. The likelihood of successful private solutions to problems caused by externalities depends, in part,
upon the number of interested parties. Briefly explain.
46. Tyler owns a dog and receives a $300 benefit from owning it. Tyler’s neighbor, Liz, incurs a cost
of $450 from the dog’s barking. Suggest a deal between Tyler and Liz that would result in both
individuals becoming better off.
47. Beverly owns a rabbit and receives a $600 benefit from owning it. Sometimes Beverly’s rabbit
makes its way onto the lawn of her neighbor, Charles, and eats the vegetables in Charles’ garden.
This intrusion by the rabbit costs Charles $400. Can both individuals become better off if Charles
pays Beverly some amount of money to get rid of the rabbit? Explain.
2734 Externalities
48. An example of a private solution to externalities is charities. The government encourages this
private solution by allowing .
49. In some situations, private economic actors cannot solve the problem of externalities among
themselves because of substantial costs.
50. Which theorem asserts that private economic actors can often solve the problem of externalities
among themselves?