Problem Set 9

Suppose Erie Textiles can dispose of its waste "for free" by dumping it into a nearby river. While the firm benefits from dumping waste into the river, the waste reduces the fish and bird reproduction. This causes damage to local fishermen and the aviarist. At a cost, Erie Textiles can filter out the toxins, in which case local fishermen or aviarist will not suffer any damage. The relevant gains (thousands of dollar) and losses for the three parties are listed below. With filter Without filter Gains to Erie Textiles $200 $400 Fishermen $180 $50 Aviarist $130 $25 11) If Erie Textiles does not install the filter that will cause a net social _____ of _____ (in thousands of dollars). A) loss; $35 B) gain; $35 C) loss; $125 D) gain; $200 E) loss; $200

A) loss; $35

Suppose Erie Textiles can dispose of its waste "for free" by dumping it into a nearby river. While the firm benefits from dumping waste into the river, the waste reduces the fish and bird reproduction. This causes damage to local fishermen and the aviarist. At a cost, Erie Textiles can filter out the toxins, in which case local fishermen or aviarist will not suffer any damage. The relevant gains (thousands of dollar) and losses for the three parties are listed below. With filter Without filter Gains to Erie Textiles $200 $400 Fishermen $180 $50 Aviarist $130 $25 12) What is the largest whole-dollar amount (in thousands of dollars) by which local fishermen and aviarist could compensate Erie Textiles for operating with a filter and still be better off than without a filter? A) $34 B) $74 C) $199 D) $201 E) $234

Answer: $235 minus Marginal profit of $1 equals $234.

4) Suppose that production of this good is accompanied by an external cost, the market equilibrium quantity is ____ and the market equilibrium price is ______. A) 0; $4 B) 1000; $3 C) 2000; $2 D) 3000; $1 E) 4000; $0

B) 1000; $3

6) Suppose, production of this good is accompanied by an external cost = $2/unit, social MC equals A) private MC - $2 B) private MC + $2 C) private MC - $0 D) private demand - $2 E) private demand + $2

B) private MC + $2

Suppose Erie Textiles can dispose of its waste "for free" by dumping it into a nearby river. While the firm benefits from dumping waste into the river, the waste reduces the fish and bird reproduction. This causes damage to local fishermen and the aviarist. At a cost, Erie Textiles can filter out the toxins, in which case local fishermen or aviarist will not suffer any damage. The relevant gains (thousands of dollar) and losses for the three parties are listed below. With filter Without filter Gains to Erie Textiles $200 $400 Fishermen $180 $50 Aviarist $130 $25 10) The daily benefit (in thousands of dollars) of the filter to the fishermen and aviarist is A) $400 B) $310 C) $235 D) $200 E) $75

C) $235

Suppose Erie Textiles can dispose of its waste "for free" by dumping it into a nearby river. While the firm benefits from dumping waste into the river, the waste reduces the fish and bird reproduction. This causes damage to local fishermen and the aviarist. At a cost, Erie Textiles can filter out the toxins, in which case local fishermen or aviarist will not suffer any damage. The relevant gains (thousands of dollar) and losses for the three parties are listed below. With filter Without filter Gains to Erie Textiles $200 $400 Fishermen $180 $50 Aviarist $130 $25 8) When Erie Textiles operates with filter, the total daily gain (in thousand of dollars) by all three parties is A) $985 B) $600 C) $510 D) $475 E) $400

C) $510

5) Suppose that production of this good is accompanied by an external cost, the private market equilibrium quantity is ______ the socially optimal quantity. A) equal to B) 1000 units less than C) 1000 units more than D) 2000 units more than E) 2000 units less than

C) 1000 units more than

3) When the market has no external costs or benefits, the resulting equilibrium quantity is ____ and price is _____. A) 0; $4 B) 1000; $3 C) 2000; $2 D) 3000; $1 E) 4000; $0

C) 2000; $2

1) Suppose coal mining produces a negative externality in the form of polluted streams. One can deduce that the unregulated A) price of coal is too high. B) quantity is too small. C) quantity is too large. D) supply curve is lower than the regulated supply curve. E) demand curve is higher than the regulated demand curve.

C) quantity is too large.

Suppose Erie Textiles can dispose of its waste "for free" by dumping it into a nearby river. While the firm benefits from dumping waste into the river, the waste reduces the fish and bird reproduction. This causes damage to local fishermen and the aviarist. At a cost, Erie Textiles can filter out the toxins, in which case local fishermen or aviarist will not suffer any damage. The relevant gains (thousands of dollar) and losses for the three parties are listed below. With filter Without filter Gains to Erie Textiles $200 $400 Fishermen $180 $50 Aviarist $130 $25 9) The daily cost (in thousands of dollars) of the filter to Erie Textiles is A) $400 B) $310 C) $235 D) $200 E) $75

D) $200

Use the following to answer questions 7-14: Suppose Erie Textiles can dispose of its waste "for free" by dumping it into a nearby river. While the firm benefits from dumping waste into the river, the waste reduces the fish and bird reproduction. This causes damage to local fishermen and the aviarist. At a cost, Erie Textiles can filter out the toxins, in which case local fishermen or aviarist will not suffer any damage. The relevant gains (thousands of dollar) and losses for the three parties are listed below. With filter Without filter Gains to Erie Textiles $200 $400 Fishermen $180 $50 Aviarist $130 $25 7) When Erie Textiles operates without filter, the total daily gain (in thousand of dollars) by all three parties is A) $985 B) $600 C) $510 D) $475 E) $400

D) $475

Suppose Erie Textiles can dispose of its waste "for free" by dumping it into a nearby river. While the firm benefits from dumping waste into the river, the waste reduces the fish and bird reproduction. This causes damage to local fishermen and the aviarist. At a cost, Erie Textiles can filter out the toxins, in which case local fishermen or aviarist will not suffer any damage. The relevant gains (thousands of dollar) and losses for the three parties are listed below. With filter Without filter Gains to Erie Textiles $200 $400 Fishermen $180 $50 Aviarist $130 $25 13) If all three parties can communicate with each other at no cost, will Erie Textiles use a filter? A) No, he makes $200 less in profit with the filter. B) Yes, he cares about the fishermen and aviarist. C) No, because Erie Textiles does not care about the society. D) Yes, because fishermen and aviarist will pay Erie Textiles to use a filter. E) No, because use of a filter would result in the smallest possible economic surplus.

D) Yes, because fishermen and aviarist will pay Erie Textiles to use a filter.

2) After correcting an externality, the equilibrium price and quantity both rose. The externality must have been a(n) A) negative externality. B) positional externality. C) prisoner's dilemma. D) positive externality. E) insufficient information to determine.

D) positive externality.

Suppose Erie Textiles can dispose of its waste "for free" by dumping it into a nearby river. While the firm benefits from dumping waste into the river, the waste reduces the fish and bird reproduction. This causes damage to local fishermen and the aviarist. At a cost, Erie Textiles can filter out the toxins, in which case local fishermen or aviarist will not suffer any damage. The relevant gains (thousands of dollar) and losses for the three parties are listed below. With filter Without filter Gains to Erie Textiles $200 $400 Fishermen $180 $50 Aviarist $130 $25 14) Suppose that Erie Textiles and the local fishermen and aviarist can negotiate with one another at no cost. If Erie textile can make $440 (in thousands of dollars) without a filter (a different assumption than the table), will he operate with a filter? A) No, he makes $200 less in profit with the filter. B) Yes, because use of a filter would result in the largest possible economic surplus. C) No, because Erie textile does not care about the fishermen or the aviarist. D) Yes, because fishermen and aviarist will pay Erie Textiles to use a filter. E) No, because use of a filter would result in the smallest possible economic surplus.

E) No, because use of a filter would result in the smallest possible economic surplus.