Chapter 8:
1. Indicate which of the following activities create a positive externality, a negative externality, or no
externality at all:
2. Draw a standard supply and demand diagram for televisions, and indicate the equilibrium price and
output.
Answer:
a. Assuming that the production of televisions generates external costs, illustrate the effect of the
being forced to pay a tax equal to the external costs generated, and indicate the equilibrium
output.
Answer:
b. If instead of generating external costs, television production generates external benefits, illustrate the
al to the external benefits generated, and indicate the
equilibrium output.
Answer:
3. For each of the goods below, indicate whether they are nonrival and/or nonexclusive. Indicate
whether they are private or public goods.
a. hot dogs
b. cable TV
c. broadcast TV
d. automobiles
e. national defense
f. pollution control
g. parking in a parking structure
h. a sunset
i. admission to a theme park
Answers:
a. hot dogs: private good
4. Is a lighthouse a public good if it benefits many ship owners? What if it primarily benefits ships going to
a port nearby?
Answer: If many ships benefit from a lighthouse, whether contributing to its upkeep or not,
5. Why do you think buffaloes became almost completely extinct on the Great Plains but cattle did not?
Why is it possible that you can buy a buffalo burger in a store or diner today?
Answer: Buffaloes almost became extinct because people did not have clear property
6. What kind of problems does the government face when trying to perform a cost-benefit analysis of
whether or how much of a public project to produce?
Answer: The government must assess the benefits and costs to the public of such
7. How does a TV broadcast have characteristics of a public good? What about cable services such as
HBO?
Answer: Consumption of an unscrambled TV broadcast is both nonexcludable and
8. In order to get a license to practice in the United States, foreign-trained veterinarians must take an
exam given by the American Veterinary Association. Only 48 people per year are allowed to take the
exam, which is administered at only two universities. The fee for the exam, which must be booked at least
18 months in advance, was recently raised from $2,500 to $6,000. What effects does this clinical
competency exam have on the number of veterinarians practicing in the United States? Do you think it
improves the quality of veterinary services?
Answer: The exam, its cost, and the waiting period likely decreases the supply of
it protects existing veterinarians from competition.
9.
used-car problem?
Answer: The adverse selection problem arises because insurance providers and potential
10. In terms of signaling behavior:
a. Why is wearing a suit a weaker signal of ability than higher educational achievement?
b. Why do some majors in college provide more powerful signals to future employers than others?
c. Why could double-majoring provide a more powerful labor market signal than having a single major?
d.
course material?
Answers:
a. Higher education advancement is much harder for a lower productivity individual to attain
11. In terms of the
a.
b.
c. e
Answers:
a. Experience with a good would mean people would seldom be fooled into overestimating the
12. In terms of moral hazard:
something valuable about the seriousness of the moral hazard problem they might expect from the
policy-holder?
b. Why does car insurance which explicitly excludes insuring the car for commercial use act to reduce
moral hazard?
c. Why does vehicle insurance based in part on miles driven reduce moral hazard problems?
d. Why would a GPS monitor that can record the location speed a rental vehicle is driven help reduce the
moral hazard problems rental companies are exposed to?
Answers:
a. With a large deductible, the individual would have to bear larger losses themselves before their
uces an insurance