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CHAPTER 16
1.1 The statement is correct. Figure 16.3 on page 336 in the text shows that when the penalty is equal
1.2 The carbon tax will increase the marginal cost of electricity providers, and will result in the
1.3 Answers will vary depending on where you are from. In general, land exists at a location, and
303
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MSC
Units of output
Price per unit ($)
0
p*
q*
Solutions to Problems 304
1.4 (a) This might work in the case of small numbers, but here large numbers of people are involved,
(b) Compensation may be fair, but there are some worries about efficiency. First is Coase’s
(c) This works perfectly in the case where the damages are very high. For example, suppose the
factory was dumping highly radioactive waste. But if the pollution damage was small relative
(d) This one is efficient assuming that the marginal damages can be measured accurately. You
1.6 False. First, the statement ignores the difficulty of negotiations when large numbers of individuals
1.7 Student answers will depend on the specific environmental disaster selected.
1.8 With external costs, the marginal social cost (MSC) of producing the product is greater than the
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MC0
MC1 = MSC
Units of output
Price per unit ($)
0
p0
q0
q1
p1
Solutions to Problems 305
1.9 The firm now must weigh the per-unit tax and damage costs into its decisions. Marginal cost is
1.10 For Vesuvius to reduce pollution from 9 units to 3 units, it must spend $67. For Etna to reduce its
pollution from 9 units to 3 units, it must spend $127. Vesuvius can spend an additional $31 to
1.11 In either situation, the townhouse will remain free of aria rehearsals. If Velma has the right to
2.1 Because of the free-rider problem and the drop-in-the-bucket problem, which exist because public
(a) With private goods, we each get to choose what quantity of a good we want. If I don’t like a
good, I don’t buy it. But with public goods, we all get the same level of output. We all breathe
(b) Representative democracy is not guaranteed to produce the socially optimal mix of public
goods. Some problems are logrolling, a poorly informed electorate, poor incentives for people
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Solutions to Problems 306
(c) An example is a bureaucrat whose primary motivation is to increase the power, prestige, and
2.2 (a) Public housing: Private aspects—there is a degree of rivalry in that public housing is limited
(b) Public transportation: Private aspects—there is rivalry as is shown by the congested streets in
(c) Trash collection: Private aspects—the service is excludable from those who do not pay for it.
(d) Fire protection: Private aspects—rivalry exists due to the limited resources available for fire
(a) Agree. An unregulated market economy tends to underproducepublic goods because
2.4 Rewrite the demand curves as:
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Solutions to Problems 307
2.5 (a) Most economists would argue that the patent system is, on balance, a good thing. True, patent
(b) Government involvement in research may be justified on several grounds. It might be better
2.6 Simply not true. Clearly, an economy with no government could not function efficiently.
Government involvement of some sort is essential. Governments provide public goods such as
Governments can be inefficient in the marketplace, and the theory of public choice reflects this.
The Coase theorem suggests that in certain circumstances, efficient solutions regarding
3.1 Traffic congestion occurs when roads are used by too many drivers at the same time. When these
roads are public roads, as most are, they are common property shared by many people. A common
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