Chapter 16, Externalities, Public Goods, and Social Choice Video Solutions, Principles of Economics

Problem 1

If government imposes on the firms in a polluting industry penalties (taxes) that exceed the actual value of the damages done by the pollution, the result is an inefficient and unfair imposition of costs on those firms and on the consumers of their products, Discuss that statement. Use a graph to show how consumers are harmed.

Check back soon!

Problem 2

It has been proposed that toll collection on the Massachusetts Turnpike, a key commuter route into Boston from the west, be discontinued. Proponents argue that tolls have long ago paid for the cost of building the rosd; now they just provide cash for a fat bureaucracy, $A$ number of economists are opposing the repeal of tolls on the grounds that they serve to internalize externalities. Explain their argument briefly.

Check back soon!

Problem 3

Many people are concerned with the problem of urban sprawl. As the development of new housing tracts and suburban shop. ping malls continues over time, metropolitan areas have become more congested and polluted. Open space disappears, and the quality of life changes. Think of your own metropolitan area, city, or town. Using the concept of externalities, consider the issue of land use and development. What are the specific decisions made in the development process that lead to externalities? On whom are the externalities imposed? Do you think that they are measurable? In what specific ways can decision makers be given the incentive to consider them? One of the cities that has paid the most attention to urban sprawl is Portland, Oregon. Search the Web to see what you can find out abeut Portland's approach.

Check back soon!

Problem 4

The existence of "public goods" is an example of potential market failure and suggests that a government or public sector can improve the outcome of completely frec markets. Write a brief summary of the arguments for government provision of public goods. (Make sure you consider the discussion of a prisoners' dilemma in the last chapter.) The following three arguments suggest that government may not improve the outcome as much as we might anticipate.
a. Public goods theory: Because public goods are collective, the government is constrained to pick a single level of output for all of us. National defense is an example. The government must pick one level of defense expenditure. Some will think it is too much, some will think it is too little, and no one is happy.
b. Problents of social choice: It is impossible to choose collectively in a rational way that satisfies voters/consumers of public goods.
c. Public choice and public officials: Once elected or appointed, public officials tend to act in accordance with their own preferences and not out of concern for the public.

Check back soon!

Problem 5

Which of the three arguments do you find to be most persuasive? It has been argued that the following are examples of "mixed goods." They are essentially private but partly public. For each example, describe the private and public components and discuss briefly why the government should or should not be involved in their provision.
a. Elementary and secondary education
b. Higher education
c. Medical care
d. Air traffic control

Check back soon!

Problem 6

A paper factory dumps polluting chemicals into the Snake River. Thousands of citizens live along the river, and they bring suit, claiming damages. You are asked by the judge to testify at the trial as an impartial expert. The court is considering four possible solutions, and you are asked to comment on the potential efficiency and equity of each. Your testimony should be brief.
a. Deny the merits of the case and affirm the polluter's right to dump. The parties will achieve the optimal solution without government.
b. Find in favor of the plaintift. The polluters will be held liable for damages and must fully compensate citizens for all past and future damages imposed.
c. Order an immediate end to the dumping, with no damages awarded.
d. Refer the matter to the Environmental Protection Agency, which will impose a tax on the factory equal to the marginal damage costs. Proceeds will not be paid to the damaged parties.

Check back soon!

04:24

Problem 7

The Economics in Practice suggests that children impose negative externalities. What does that imply about discounts for children's meals at restaurants and discount tickets for children at museums? Provide three examples of activities that may, in fact, generate positive externalities.

Jennifer Stoner

Numerade Educator

Problem 8

Explain why you agree or disagree with each of the following statements:
a. The government should be involved in providing housing for the poor because housing is a "public good"
b. From the standpoint of economic efficiency, an unregulated market economy tends to overproduce public goods.

Check back soon!

Problem 9

Society is made up of two indrviduals, $A$ and $B$, whose demands for public good $\mathrm{X}$ are given in Figure 1. Assuming that the public good can be produced at a constant marginal cost of $$\$ 6$$, what is the optimal level of output? How much would you charge $A$ and $B$ ?

Check back soon!

Problem 10

Government involvement in general scientific research has been justified on the grounds that advances in knowledge are public goods ance produced, information can be shared at virtually no cost. A new production technology in an industry could be made available to all firms, reducing costs of production, driving down price, and benefiting the public. The patent system, however, allows private producers of "new knowledge" to exclude others from enjoying the benefits of that knowledge. Inventors would have little inceative to produce new knowledge if there was no possibility of profiting from their inventions. If one company holds exclusive rights to an advanced production process, it produces at lower cost but can use the exclusion to acquire monopoly power and hold price up.
a. On balance, is the patent system a good or bad thing? Explain.
b. Is government involvement in scientific research a good idca? Discuss.

Check back soon!

Problem 11

The Coase theorem implies that we never need to worry about regulating externalities because the private individuals involved will reach the efficient outcome through negotiations. Is that statement true or false? Justify your answer and use examples.

Check back soon!

Problem 12

The recent economic growth resulting from government policies of newly industrializing nations such as India and China has increased environmental strains on global air and water systems. The negative externalities associated with this economic growth demonstrate that the best economic system is one in which all economic decisions are made by individual bouseholds and firms without amy government involvement. Comment briefly.

Check back soon!

02:06

Problem 13

The United Nations Climate Change Conference was scheduled to be held in Cancun, Mexico, from November 29-December 10, 2010. Search the Internet to find information about this conference. Write a brief essay on any binding deals concerning global warming which were reached at the conference. If no deals were reached, discuss which nations prevented any binding resolutions and what issues stood in the way of reaching these deals.

Billy Huggins

Numerade Educator

Problem 14

The following diagram represents the profit-maximizing price and eutput for a firm in a perfectly competitive industry with no externalities. Use this diagram to explain what will happen if the production of the product imposes external costs on society and these costs are not factored into production decisions.

Check back soon!

01:11

Problem 15

Refer to the previous question but assume that the government has imposed a per-unit tax on this product which is exactly equal to the marginal damage costs. Use the diagram to show what will happen to production, eutput, and price.

Carson Merrill

Numerade Educator

03:37

Problem 16

Suppose the nation of Valencia must decide which project to fund: public transportation, construction of a seaport, or a national Wi-Fi network. The nation has the available funds to finance only one of these projects, and the decision is up to Valencia's three-person finance committee. The order of preference of the finance committee members is shown in the table. Explain whether the information in the table will Iead to a voting paradox.

$$
\begin{array}{lccc}
\text { PROJECT } & \text { DEIIA } & \text { ANDREW } & \text { MALIKA } \\
\hline \text { Public teanspotcation } & 1 & 3 & 2 \\
\text { Seaport constraction } & 2 & 1 & 3 \\
\text { Wi-F netwotk } & 3 & 2 & 1
\end{array}
$$

Jesse Neumann

Numerade Educator

Problem 17

Two firms, Cappcore and Tradioln, are each emitting 6 units of pollution, and the goverament wants to reduce the total level of pollation from the current level of 12 to 4 . To do this, the government caps each firm's allowed pollution level at 2. Each firm must now pay to cut pollution levels by 4 units. A cap-and-trade policy gives each of these firms two permits and allows them to trade permits if they choose. Based on the table below which represents the situation faced by these two firms, what will the firms want to do?

$$
\begin{array}{|c|c|c|c|c|c|}
\hline \text { POLLUTION } & \text { MCOF } & \text { TCOF } & \text { POUUTION } & M C \text { OF }^F & \text { TCOF } \\
\hline \text { RIDUCTION, } & \text { REDUCING } & \text { REDUCING } & \text { REDUCTION, } & \text { REDUCDNG } & \text { RPDUCDNG } \\
\hline \text { UNITS } & \text { POLuTTION } & \text { POLUTION } & \text { UNITS } & \text { POLUTION } & \text { POLUTION } \\
\hline 1 & 57 & 57 & 1 & \$ 3 & \$ 3 \\
\hline 2 & 10 & 17 & 2 & 4 & 7 \\
\hline 3 & 14 & 31 & 3 & 6 & 13 \\
\hline 4 & 19 & \text { so } & 4 & 9 & 22 \\
\hline 5 & 26 & 76 & 5 & 14 & 36 \\
\hline 6 & 35 & 111 & 6 & 21 & 57 \\
\hline
\end{array}
$$

Check back soon!

Problem 18

Sammy, a drummer in a local band, and Dean, a labrarian at a local university, share a condo in San Diego. Sammy enjoys playing his drums at home, and Dean enjoys reading in silence. Dean is willing to pay Samany 5125 if he will stop playing the drums at home. Sammy offers Dean $\$ 75$ per week to find some place else to read. If Dean has the right to read in silence. cxplain why the condo will be frec of drum playing. If Sammy has the right to play his drums, explain why the condo will still be free of drum playing.

Check back soon!