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10) "According to the Coase theorem, if Gabriel wants the local television station to cease
having helicopters fly over his house at night, he will be more likely to be able to reach an
agreement with the station if the property right to the airspace is clearly defined and the
transaction costs of negotiating are high." Is this statement true or false? Explain your answer.
11) What do we mean by "property rights" and why are they important?
12) If the production of a good causes pollution (an external cost) is the unregulated competitive
market equilibrium of that product efficient?
13) Burning coal to generate electricity can create pollution. If the market for generating
electricity is competitive and is allowed to operate without any government intervention, is the
equilibrium quantity of coal burned equal to, more than, or less than the efficient quantity?
14) "If production of a good creates an external cost, then, when production is such that the
marginal private costs are equal to the marginal private benefits, the market outcome will be
inefficient." Explain whether this assertion is correct or incorrect.
15) Use the idea of external costs to explain why some cities have laws against late-night rock
concerts.
16) List and briefly define the three methods government can use to cope with an external cost,
such as pollution.
17) What are marketable permits? Suppose there are two firms in an area, each emitting tons of
sulfur. The government decides on a target level of 200 tons of sulfur, and gives each firm a
permit to emit 100 tons of sulfur. Suppose Firm A is very efficient and can reduce pollution by
100 tons with an abatement cost of $500. Firm B has an older plant, so it will cost Firm B $1,000
to reduce emissions by 100 tons. What will occur with marketable permits?
18) The production of paper creates pollution, an external cost. What happens to the production
of paper if the government imposes a tax on paper producers equal to the marginal external cost
of the pollution?
19) How has air quality changed in the United States since 1980?
20) If the marginal social cost of a good is $70 and the marginal external cost is $20, what does
the marginal private cost equal?
21) The table above gives the private costs and external costs of producing paper.
a. Complete the table by finding the marginal social cost at each level of production.
b. If the market is competitive and is left unregulated and 400 tons of paper are produced, what
is the price of a ton of paper?
c. If the government imposes a tax equal to the external cost at each level of production, what
price would be charged if 400 tons are produced?
22) Suppose unregulated production of pesticides results in an equilibrium price and quantity of
$400 and 1,000 tons per day, respectively, and a marginal external cost of $10 a ton.
a. If the government were to eliminate the external cost by using pollution charges, what should
the pollution charge be set at?
b. If the government were to eliminate the external cost by using taxes, what should the tax
equal?
c. Would the government actions described above affect the quantity of pesticides produced? If
yes, how? If no, why not?
23) Use the figure above to answer this question. Explain what the marginal social cost curve
and the marginal external cost mean. In the figure, if the market is competitive and unregulated,
what is the equilibrium price and quantity? What is the efficient amount of output? Illustrate the
deadweight loss.
24) The above figure shows the market for fertilizer. When fertilizer is applied to lawns, it runs
off into neighboring streams and ponds, killing fish and creating an external cost.
a. What is the equilibrium price and quantity of fertilizer in an unregulated, competitive
market?
b. What is the efficient quantity of fertilizer?
c. Suppose government imposes a tax equal to the marginal external cost. What is the
equilibrium price paid by consumers and the equilibrium quantity after implementation of the
tax?
d. At the output level in part (c), how much is the tax?
e. How much tax revenue does government collect?
f. What is the deadweight loss borne by society if the externality is left uncorrected?
25) The figure above shows the market for steel, the production of which creates pollution.
a. What point represents the equilibrium price and what point represents the equilibrium
quantity in an unregulated, competitive market?
b. What area represents the deadweight loss of the unregulated, competitive market outcome?
c. What point represents the efficient quantity?
d. If the output level in part (c) was achieved through the use of a government imposed tax,
what price would consumers pay? What price would the producers receive? What distance
represents the amount of the tax?
e. If government successfully uses marketable permits to eliminate the external cost, what point
represents how much output would be produced?
11.6 Essay: Common Resources
1) What is the tragedy of the commons?
2) "The problem with a common resource is that no one gets to use the resource." Comment on
the preceding assertion.
3) Why are fish in the ocean an example of a resource that suffers from the tragedy of the
commons but cattle grazing in a farmer's pasture do not suffer from the tragedy of the commons?
4) How does the marginal social benefit curve of a common resource compare to the marginal
private benefit curve of the common resource? If there is a difference, why is there a difference?
If there is not a difference, why is there not a difference?
5) How does the government determine the quota amount that will produce an efficient use of a
common resource?
6) What is an individual transferable quota (ITQ)?
