Microeconomics: Chapter 11

If either the production or consumption of a good generates an external cost, then the market equilibrium quantity will be:

greater than the socially optimal quantity.

If the equilibrium quantity is equal to the socially optimal quantity, one can infer that:

there is no externality associated with this good.

Suppose that your neighbor smokes in his yard. You can smell his cigarette smoke from inside your house, and you dislike the smell. Which of the following statements is correct?

If it is difficult for you and your neighbor to negotiate with each other, then you may not be able to arrive at an efficient solution to this problem.

Suppose there are ten people playing cards in a room. One of them wants to smoke a cigar, nine of them dislike the smell of cigar smoke. The smoker values the privilege of smoking at $5, and each of the other nine people of the room would be willing to pay fifty cents for clean air in the room. The rules governing use of the room state that smoking is not allowed unless everyone agrees to allow smoking. If all ten people can negotiate with each other at no cost, then which of the following outcomes is consistent with the Coase theorem?

The cigar smoker will pay each of the other nine people fifty-five cents, and they will agree to allow smoking.

The use of pollution permits by the government to reduce pollution is:

common in several parts of the United States.

Refer to the figure below. This graph describes a good that:

generates negative externalities.

Two firms, Kegareta Inc. and Sucio Enterprises, have access to five production processes, each one of which has a different cost and gives off a different amount of pollution. The daily costs of the processes and the corresponding number of tons of smoke emitted are shown in the accompanying table. If the government requires each firm to cut its emissions by 50 percent, what would be the total cost to society of this policy?

$225 per day

Suppose that a vaccine is developed for a highly contagious strain of flu. The likelihood that anyone will get this flu decreases as more people receive the vaccine. One of the demand curves below represents the private demand for the vaccine and the other represents the social demand for the vaccine. At the private market equilibrium, the deadweight loss is ______ per day.

$250

Two companies, Dirty Inc. and Filthy Inc., each of which has access to 5 different production processes, each of which has a different cost and produces a different amount of pollution. The daily costs of the processes and the number of tons of smoke emitted are shown in the table below. Suppose pollution is initially unregulated. If the City Council imposes a tax of $91 per day on each ton of smoke emitted, then what will be the total cost to society of the resulting reduction in pollution?

$270

Suppose that a vaccine is developed for a highly contagious strain of flu. The likelihood that anyone will get this flu decreases as more people receive the vaccine. One of the demand curves below represents the private demand for the vaccine and the other represents the social demand for the vaccine. At the private market equilibrium, the price of each dose is:

$50

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 fish and bird reproduction. This causes damage to local fishermen and bird watchers. At a cost, Erie Textiles can filter out the toxins, in which case local fishermen and bird watchers will not suffer any damage. The relevant gains and losses (in thousands of dollars) for the three parties are listed below. When Erie Textiles operates with a filter, the total gain (in thousands of dollars) by all three parties is ______.

$510

A village has five residents, each of whom has an accumulated savings of $50. Each villager can use the money to buy a government bond that pays 10 percent interest per year or to buy a year-old goat, send it onto the commons to graze, and sell it after one year. The price of the goat that the villager will get at the end of the year depends on the amount of weight it gains while grazing on the commons, which in turn depends on the number of goats sent onto the commons, as shown in the table below. Assume that if a villager is indifferent between buying a bond and buying a goat, the villager will buy a goat. If the villagers purchase the socially optimal number of goats and bonds, then total village income will be ______.

$70

Refer to the figure below. Private incentives in this market generate deadweight loss equal to _______.

1/2 x VW x KM

Two firms, Acme and FirmCo, have access to five production processes, each of which has a different cost and gives off a different amount of pollution. The daily costs of the processes and the corresponding number of tons of smoke emitted are shown in the table below. Suppose the firms are both currently using process A. If the government imposes a tax of $110 per ton of smoke emitted, a total of ______ tons of smoke will be emitted each day, and the total cost to society of this policy will be ______ per day.

16; $250

A village has five residents, each of whom has an accumulated savings of $50. Each villager can use the money to buy a government bond that pays 10 percent interest per year or to buy a year-old goat, send it onto the commons to graze, and sell it after one year. The price of the goat that the villager will get at the end of the year depends on the amount of weight it gains while grazing on the commons, which in turn depends on the number of goats sent onto the commons, as shown in the table below. Assume that if a villager is indifferent between buying a bond and buying a goat, the villager will buy a goat. What is the socially optimal number of goats to be sent out onto the commons?

3

On Saturdays, Stan goes to the park to play his saxophone. Some of the people in the park love listening to Stan play, while others find his music really annoying. In this case, Stan's saxophone playing generates:

both positive and negative externalities.

Refer to the figure below. At the private market equilibrium quantity, the social marginal cost of the last unit produced is ______ the marginal benefit of the last unit produced.

greater than

Suppose that a government agency is trying to decide between two pollution reduction policy options. Under the permit option, 100 pollution permits would be sold, each allowing emission of one unit of pollution. Firms would be forced to shut down if they produced any units of pollution for which they did not hold a permit. Under the pollution tax option, firms would be taxed $250 for each unit of pollution emitted. The regulated firms all currently pollute and face varying costs of pollution reduction, though all face increasing marginal costs of pollution reduction. Suppose the regulators chose the permit policy instead of the tax policy. What might explain that decision?

The permit policy allows regulators to achieve reduction goals without having detailed knowledge about firms' abatement costs.

Shel and Fran are neighbors. They work at the same firm and hold the same title. Shel finds that when Fran's consumption rises, Shel feels worse off. Fran feels the same way about Shel's consumption. Suppose the firm that employs both Fran and Shel begins to offer one hour of overtime at 1.5 times their base hourly wage. It is likely that:

both Fran and Shel will work more.

This graph shows the marginal cost and marginal benefit associated with roadside litter clean up. Assume that the marginal benefit curve and marginal cost curve each have their usual slope. Picking up the 20th bag of litter would:

create deadweight loss.

Pollution permit policies achieve an ______ outcome because _____.

efficient; firms that have the highest cost of reducing pollution will have the greatest incentive to purchase permits.

The major difficulty with using a tax on pollution instead of a fixed percentage reduction regulation is:

establishing the optimal size of the tax.

From society's standpoint, positional arms races lead to outcomes that are ______.

inefficient

Suppose Frank likes to snack on sugary candy. Frank knows that it's bad for his teeth to eat sugary candy, but he doesn't care. Frank's snacking habits have no impact on anyone other than Frank. In this case, Frank's consumption of sugary candy generates:

neither a positive nor a negative 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 fish and bird reproduction. This causes damage to local fishermen and bird watchers. At a cost, Erie Textiles can filter out the toxins, in which case local fishermen and bird watchers will not suffer any damage. The relevant gains and losses (in thousands of dollars) for the three parties are listed below. Local fishermen and bird watchers would be willing to compensate Erie Textiles ______ for operating with a filter.

no more than $235,000

Refer to the figure below. This graph suggests that the private market provides incentives to:

over-produce paper relative to the social optimum.

Suppose there are ten people playing cards in a room. One of them wants to smoke a cigar, nine of them dislike the smell of cigar smoke. The smoker values the privilege of smoking at $5, and each of the other nine people of the room would be willing to pay fifty cents for clean air in the room. The rules governing use of the room state that smoking is not allowed unless everyone agrees to allow smoking. If the rules governing the room instead stated that smoking is allowed unless everyone in the room agrees to prohibit it, then:

the cigar smoker will smoke and not have to pay the other occupants for the external cost.

Suppose that the EPA has proposed strict controls on the amount of sulfur that diesel fuel contains. These controls were designed to fully offset the cost of pollution generated by diesel fuel vehicles. The effect of the regulation is estimated to increase the equilibrium price of a gallon of diesel fuel by 10 cents. Assuming that the supply of diesel fuel has a positive slope and demand has a negative slope, one can infer that the EPA determined that:

the external cost of using diesel fuel is greater than 10 cents.

Early settlers in the town of Dry Gulch drilled wells to pump as much water as they wanted from the single aquifer beneath the town. (An aquifer is an underground body of water.) As more people settled in Dry Gulch, the aquifer level fell and new wells had to be drilled deeper at higher cost. In Dry Gulch, the supply of water is:

upward-sloping.

Suppose there are ten people playing cards in a room. One of them wants to smoke a cigar, nine of them dislike the smell of cigar smoke. The smoker values the privilege of smoking at $5, and each of the other nine people of the room would be willing to pay fifty cents for clean air in the room. The rules governing use of the room state that smoking is not allowed unless everyone agrees to allow smoking. If all ten people can negotiate with each other at no cost, then the Coase theorem predicts that if the cigar smoker has the right to determine whether smoking is allowed, then there ______ be smoking, and if the other nine people in the room have the right to determine whether smoking is allowed, then there ______ be smoking.

will; will