Carleton University ECON 2030 tb ch18 CHAPTER 18 Externalities, Commons, and Public Goods

CHAPTER 18 Externalities, Commons, and Public Goods TRUE/FALSE/EXPLAIN 1) In the presence of a negative externality generated by producing a good, a competitive market will produce more of that good than is socially o ...

CHAPTER 18 Externalities, Commons, and Public Goods TRUE/FALSE/EXPLAIN 1) In the presence of a negative externality generated by producing a good, a competitive market will produce more of that good than is socially optimal. 2) To maximize welfare in a competitive market that has a negative externality in production, government should tax a pollution-generating good at a specific tax equal to the marginal cost of producing the good. 3) Because a monopoly will produce less of a good than a competitive market will, welfare is always greater under monopoly than under competition in the presence of a negative externality. 4) Firms that are most likely to buy marketable pollution rights are those that produce the most pollution per unit of output produced. 5) The efficient quantity of a public good occurs when the marginal cost of providing that good equals the sum of the marginal benefits to all individuals. Topic: Public Goods PROBLEMS 1) Suppose that in the market for paper, demand is p = 100 - Q. The private marginal cost is MCp = 10 + Q. Pollution generated during the production process creates external marginal harm equal to MCe = Q. What specific tax would result in a competitive market producing the socially optimal quantity of paper? 2) Suppose that in the market for paper, demand is p = 100 - Q. The private marginal cost is MCp = 10 + Q. Pollution generated during the production process creates external marginal harm equal to MCe = Q. Is social welfare greater under monopoly or under competition? 3) Suppose that the market for steel is shown in Figure 18.1. What specific tax would result in a competitive market producing the socially optimal quantity of steel? 4) In terms of cost-benefit analysis, explain why a competitive market produces too much pollution. 5) Suppose that the market for steel is shown in Figure 18.1. Is social welfare greater under monopoly or under competition? 6) Explain how a specific tax equal to the marginal harm of pollution can increase or decrease total welfare in a monopoly market. 7) A firm operates and produces pollution that only harms an individual, Bob. The firm and Bob both know the costs and benefits of reducing pollution. Neither the firm nor Bob acts strategically while bargaining, and there are no transaction costs associated with bargaining. Explain how the efficient level of pollution occurs no matter whether the firm or Bob owns the property right to pollution. 8) Figure 18.3 shows the marginal benefit from pollution for two firms. If both firms receive a marketable permit to pollute 25 units of pollution each, how much will each firm pollute and how much will a permit for one unit of pollution be worth? 9) Figure 18.4 shows the payoff matrix for two firms. A chemical firm must choose between a low level of production which yields one ton of pollution into a nearby lake and a high level of production which yields two tons of pollution into the nearby lake. A private beach on the lake must decide whether to operate or not. Increased pollution reduces the number of people who wish to visit the beach. Determine the Nash equilibrium without property rights. 10) Figure 18.4 shows the payoff matrix for two firms. A chemical firm must choose between a low level of production which yields one ton of pollution into a nearby lake and a high level of production which yields two tons of pollution into the nearby lake. A private beach on the lake must decide whether to operate or not. Increased pollution reduces the number of people who wish to visit the beach. If the chemical firm owns the lake and the beach owner must pay the chemical firm $10 to produce only one ton of pollution, what is the outcome? If the beach owner owns the lake and the chemical firm must pay $10 per ton of pollution, what is the outcome? Compare this result to the case where nobody owns the lake. 11) Explain the externality generated when a shepherd grazes sheep in a field which is common property that several other shepherds use. 12) Explain why the social demand curve for a public good is the vertical sum of the demand curves of each individual. 13) Suppose three neighbors must vote on the installation of a traffic light that costs $210. The cost of the light will shared by all three. Voter A values the light at $50; voter B values the light at $50; and voter C (who drives the most) values the light at $200. If the voting rule is that the majority wins, does the light get purchased? Is it efficient to purchase the light? 14) Suppose 100 citizens each derive marginal benefit from submarines according to the function MB = 10 - Q. If subs cost $100 each to produce, what is the efficient quantity of submarines? 15) Two neighboring farmers must each decide whether to contribute to a fence that separates their properties. The fence costs a total of $20. Both farmers currently have a profit of $30 each. With a fence to keep each farmer's animals from wandering onto the other's property, both farmers would experience a $15 rise in profits. Draw the payoff matrix and discuss the possible outcomes.