The graph shows the market for fire extinguishers.
Determine whether the private and social values are equal in this case. If they are not, shift the demand curve in the appropriate direction to reflect this difference. Then determine whether the private and social costs are equal in this case. Again, if they are not, shift the supply curve to reflect this difference.
Use the black point (plus symbol) to indicate the market equilibrium level of output. Then use the grey point to indicate the efficient level of output in this case.
Because fire extinguishers exhibit a positive externality, the demand curve does not reflect the value to society of the good. Therefore, the social-value curve lies above the demand curve, and the social-cost curve is equal to the supply curve.
The market equilibrium level of output occurs where quantity demanded equals quantity supplied, or where the demand and supply curves intersect. However, the efficient level of output occurs where the social-value curve and the social-cost curve (which is supply in this case) intersect. Therefore, the socially optimal quantity is greater than the quantity that the private market would naturally reach on its own.
True or False: Taxing people $10 for every fire extinguisher they buy would yield the efficient outcome.
True or False: The government could achieve the efficient outcome by giving out fire extinguishers for free using tax revenue.
False
True or False: Subsidizing people $10 for every fire extinguisher they buy would yield the efficient outcome.
True
The following graph shows the market for alcohol.
Determine whether the private and social values are equal in this case. If they are not, shift the demand curve in the appropriate direction to reflect this difference. Then determine whether the private and social costs are equal in this case. Again, if they are not, shift the supply curve to reflect this difference.
Because alcohol consumption exhibits a negative externality, the supply curve does not reflect the cost to society of the good. Therefore, the social-cost curve lies above the supply curve, and the social-value curve is equal to the demand curve.
At the market equilibrium, the social cost of alcohol consumption is _____ than the social value, resulting in a deadweight loss.
greater
less
If society wishes to reduce overall pollution by a certain amount, it is efficient to have different amounts of reduction at different firms because the costs of reducing pollution _____ across firms.
differ
Why are command-and-control approaches generally unable to target the firms that should undertake bigger reductions? Select all that apply.
A. The costs of reducing pollution are the same across firms.
B. There is no incentive to reduce pollution beyond the mandated amount.
C. Command-and-control approaches often rely on uniform reductions among firms.
B, C
Economists argue that appropriate corrective taxes or tradable pollution rights will result in efficient pollution reduction.
Which of the following statements support(s) this claim? Select all that apply.
A. With corrective taxes or tradable pollution rights, firms spend less in research on pollution control.
B. Corrective taxes or tradable pollution rights give firms greater incentives to reduce pollution.
C. The government does not have to figure out which firms can reduce pollution the most.
B, C
Tim loves playing rock 'n' roll music at high volume. Brian loves opera and hates rock 'n' roll. Unfortunately, they are next-door neighbors in an apartment building with paper-thin walls.
In this case, ______ imposes a _____ externality on his neighbor in the form of noise pollution.
Tim, negative
True or False: According to the Coase theorem, Tim and Brian might not be able to reach an agreement if the transaction costs are high.
True
Which direction does the demand curve shift?
LEFT
Suppose the corrective tax policy and the number of pollution permits available do not change in spite of this demand shift.
As a result of the technology change, the price of pollution will change under _____, and the quantity of pollution will change under _____.
a pollution permits system, a corrective tax system
True
False
In terms of economic efficiency in the market for pollution, having the government auction the permits off is _____ distributing them to firms.
as efficient as
True
True
True
An externality arises when a firm or person engages in an activity that affects the wellbeing of a third party, yet neither pays nor receives any compensation for that effect. If the impact on the third party is beneficial, it is called a _____ externality.
With this type of externality, in the absence of government intervention, the market equilibrium quantity produced will be _____ than the socially optimal quantity.
positive, less
Which of the following generate the type of externality previously described? Select all that apply.
A. A leading software company has decided to increase its research budget for inventing new open-source technologies.
B. Your roommate Rosa has bought a cat to which you are allergic.
C. Frances has planted hundreds of flowers in her front yard, beautifying the neighborhood both for herself and for her neighbors.
D. The city where you live has granted a permit to put a movie theater in your neighborhood, causing traffic jams at night and on weekends.
A, C
Which of the following types of private solutions to the externality of pollution has occurred in this case?
A. Charities
B. Integration of different types of businesses through merger or acquisition
C. Contracts
D. Moral codes and social sanctions
A
It's important to note that sometimes private solutions to externalities do not work. For example, this occurs when the number of parties involved is so large that it makes ______ .
coordinating negotiations among all of the parties too costly
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