Quiz 6b

What is the socially-optimal quantity of output in this market?

10 units

The difference between social cost and private cost is a measure of the

cost of an externality.

If the government wanted to subsidize this market to achieve the socially-optimal level of output, how large would the subsidy need to be?

less than $2

How large would a corrective tax need to be to move this market from the equilibrium outcome to the socially-optimal outcome?

$2

Two firms, A and B, each currently dump 50 tons of chemicals into the local river. The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution dumped into the river. It costs Firm A $100 for each ton of pollution that it eliminates before it reaches the river, and it costs Firm B $50 for each ton of pollution that it eliminates before it reaches the river. The government gives each firm 20 pollution permits. Government officials are not sure whether to allow the firms to buy or sell the pollution permits to each other. What is the total cost of reducing pollution if firms are not allowed to buy and sell pollution permits from each other? What is the total cost of reducing pollution if the firms are allowed to buy and sell permits from each other?

$4,500; $4,000

What is the equilibrium price in this market?

$8

John lives in an apartment building and gets a $700 benefit from playing his stereo. Mary, who lives next door to John and often loses sleep due to the music coming from John's stereo, bears a $1,000 cost from the noise. At which of the following offers from Mary could both Mary and John benefit from the silencing of John's stereo?

$900

Two firms, A and B, each currently emit 100 tons of chemicals into the air. The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution emitted into the air. The government gives each firm 40 pollution permits, which it can either use or sell to the other firm. It costs Firm A $200 for each ton of pollution that it eliminates before it is emitted into the air, and it costs Firm B $100 for each ton of pollution that it eliminates before it is emitted into the air. After the two firms buy or sell pollution permits from each other, we would expect that Firm A will emit

20 fewer tons of pollution into the air, and Firm B will emit 100 fewer tons of pollution into the air.

What is the equilibrium quantity of output in the market?

3 units

What is the socially-optimal quantity of output in this market?

4 units

Two firms, A and B, each currently emit 100 tons of chemicals into the air. The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution emitted into the air. The government gives each firm 40 pollution permits, which it can either use or sell to the other firm. It costs Firm A $200 for each ton of pollution that it eliminates before it is emitted into the air, and it costs Firm B $100 for each ton of pollution that it eliminates before it is emitted into the air. It is likely that

Firm A will buy all of Firm B's pollution permits. Each one will cost between $100 and $200.

Suppose that electricity producers create a negative externality equal to $6 per unit. Further suppose that the government imposes a $8 per-unit tax on the producers. What is the relationship between the after-tax equilibrium quantity and the socially optimal quantity of electricity to be produced?

The after-tax equilibrium quantity is less than the socially optimal quantity.

Suppose that electricity producers create a negative externality equal to $5 per unit. Further suppose that the government gives a $5 per-unit subsidy to producers. What is the relationship between the equilibrium quantity and the socially optimal quantity of electricity to be produced?

The equilibrium quantity is greater than the socially optimal quantity.

Suppose that flu shots create a positive externality equal to $12 per shot. Further suppose that the government offers a $15 per-shot subsidy to producers. What is the relationship between the equilibrium quantity and the socially optimal quantity of flu shots produced?

The equilibrium quantity is greater than the socially optimal quantity.

Suppose that flower gardens create a positive externality equal to $1 per plant. What is the relationship between the equilibrium quantity and the socially optimal quantity of plants grown?

The equilibrium quantity is less than the socially optimal quantity.

Suppose that flu shots create a positive externality equal to $12 per shot. Further suppose that the government offers a $5 per-shot subsidy to producers. What is the relationship between the equilibrium quantity and the socially optimal quantity of flu shots produced?

The equilibrium quantity is less than the socially optimal quantity.

Alexander lives in an apartment building and gets a $250 benefit from playing his stereo. Mary, who lives next door to Alexander and often loses sleep due to the loud music coming from Alexander's stereo, bears a $350 cost from the noise. Mary would like to offer Alexander some money to turn down the volume on his stereo. If Mary had to hire a lawyer to draw up the contract, what is the maximum amount she could pay to the lawyer to ensure that both Alexander and Mary would benefit from the agreement?

an amount less than $100

When a market is characterized by an externality, the government

can correct the market failure in the case of both positive and negative externalities by inducing market participants to internalize the externality.

Corrective taxes differ from most taxes in that corrective taxes

enhance economic efficiency.

Suppose planting flowering shrubs creates a positive externality equal to $7 per shrub. Further suppose that the local government offers a $7 per-shrub subsidy to planters. The number of shrubs that are planted is then

equal to the socially optimal quantity.