Chapter 10 Questions for Review
Imagine that you are a nonsmoker sharing a room with a smoker. According to the Coase theorem, what determines whether your roommate smokes in the room? Is this outcome efficient? How do you and your roommate reach this solution?
According to the Coase theorem, you and your roommate will bargain over whether your roommate will smoke in the room. If you value clean air more than your roommate values smoking, the bargaining process will lead to your roommate not smoking. But if your roommate values smoking more than you value clean air, the bargaining process will lead to your roommate smoking. The outcome is efficient as long as transaction costs do not prevent an agreement from taking place. The solution may be reached by one of you paying off the other either not to smoke or for the right to smoke
What are corrective taxes? Why do economists prefer Corrective Taxes to regulations as a way to protect the environment from pollution?
Corrective taxes are taxes enacted to correct the effects of a negative externality. Economists prefer corrective taxes over regulations as a way to protect the environment from pollution because they can reduce pollution at a lower cost to society. A tax can be set to reduce pollution to the same level as a regulation. The tax has the advantage of letting the market determine the least expensive way to reduce pollution. The tax gives firms incentives to develop cleaner technologies to reduce the taxes they have to pay
Give an example of a negative externality and a positive externality.
Examples of negative externalities include pollution, barking dogs, and consumption of alcoholic beverages. Examples of positive externalities include the restoration of historic buildings, research into new technologies, and education
List some of the ways that the problems caused by externalities can be solved without government intervention.
Externalities can be solved without government intervention through moral codes and social sanctions, charities, merging firms whose externalities affect each other, or by contract.
Draw a supply-and-demand diagram to explain the effect of a negative externality that occurs as a result of a firm's production process
The equilibrium quantity provided by the market is Qmarket. Because of the externality, the social cost of production is greater than the private cost of production, so the social-cost curve is above the supply curve. The optimal quantity for society is Optimum. The private market produces too much of the good because Qmarket is greater than Qoptimum
In what way could a patent system help society solve an externality problem?
The patent system helps society solve the externality problem from technology spillovers. By giving inventors exclusive use of their inventions for a certain period, the inventor can capture much of the economic benefit of the invention. In doing so, the patent system encourages research and technological advance, which benefits society through spillover effects.
