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BUSA 201 – Questions & Complete Solutions
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BUSA 201 – Questions & Complete SolutionsAn example of a positive externality Right Ans - Hillary's newly cut lawn
makes her neighborhood more attractive
If the production of a good yields a negative externality, then the social cost
curve lies ____ the supply curve, and the socially optimal quantity is _____ than
the equilibrium quantity Right Ans - above, less
When the government levies a tax on a good equal to the external cost
associated with the good's production, it ___ the price paid by consumers and
makes the market outcome ___ efficient Right Ans - increases, more
Which of the following statements about corrective taxes is generally not true
Right Ans - they reduce the quantity sold in a market
The government auctions off 500 units of pollution rights. They sell for $50
per unit, raising total revenue of $25,000. This policy is equivalent to a
corrective tax of ___ per unit of pollution Right Ans - $50
The Coase theorem does not apply if Right Ans - transaction costs make
negotiating difficult
Negative externality Right Ans - air pollution from a nearby factory
Positive externality Right Ans - walking to work reduces air pollution for
everyone in the city
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 Right Ans -
In what way does the patent system help society solve an externality
problem? Right Ans - The patent laws protect the rights of inventors by
giving them exclusive use of their inventions for a period of time. When a firm
makes a technological breakthrough, it can patent the idea and capture much
of the economic benefit for itself. The patent internalizes the externality by
giving the firm a property right over its invention.
, What is a corrective tax Right Ans - Tax designed to induce private decision
makers to take account of the social costs that arise from a negative
externality
Why do economists prefer corrective taxes to regulations as a way to protect
the environment from pollution Right Ans - Because they can reduce
pollution at a lower cost to society. When you charge (ex) 50,000 dollars for
each ton of pollution the factories find more efficient ways to rid of their
waste.
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 a
decision? Right Ans - According to this theorem, you and your roommate
will bargain over whether your roommate can continue to 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.
Consider two ways to protect your car from theft. The Club (a steering wheel
lock) makes it difficult for a car thief to take your car. Lojack (a tracking
system) makes it easier for the police to catch the car thief who has stolen it.
Which of these methods conveys a positive externality? Do you think there are
any policy implications of your analysis? Right Ans - The Club conveys a
negative externality on other car owners because car thieves will not attempt
to steal a car with the Club visibly in place. This means that they will move on
to another car. A policy implication includes a tax on those who use the Club.
Consider the market for fire extinguishers.
Why might fire extinguishers exhibit positive externalities?
Draw a graph of the market for fire extinguishers.
Indicate the market equilibrium and efficient output. Why do these differ? If
the external benefit is 10 per extinguisher, describe a government policy that
would result in an efficient outcome. Right Ans - Fire extinguishers exhibit
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