Goolsbee1e_Solutions_Manual_Ch16 - Economics 370...

Solution
1. Kansas City is famous for its barbeque. But, good barbeque comes at a cost: Pit masters have to bear the
costs of producing slow-roasted pulled pork and beef briskets. There is also an external cost: Every time
a pit master roasts another rack of ribs, it offends the sensibilities of nearby animal lovers. Consider the
graphical representation of a typical pit master in the competitive BBQ industry below:
Quantity
of (racks)
Price
($/rack)
0
80 100 20
1
$5
MC
D
SMC = MC + EMC
EMC
a. What is the market price of barbeque?
b. How much psychic damage (external cost) do animal lovers suffer for each rack roasted?
c. If our pit master accounts only for her private costs, how many racks will she roast? How much total
damage will animal lovers suffer?
d. If our pit master feels sympathy for animal lovers and wholly considers their feelings in her decision
about how many racks to produce, how many racks will she roast?
e. Does the decision to consider animal lovers’ feelings eliminate the damage they suffer from transactions
in the rib market?
f. Cutting output below the level you determined in (d) clearly benefits animal lovers. Who is hurt by
such a decision? Explain why such an output cut would not be Pareto efficient, that is, there is another
allocation that would make someone better off without making anyone worse off.
2. Jill sells bouquets of flowers that she grows in her backyard. Jill’s marginal cost of producing bouquets is
given by MC = 0.25 Q , where Q is the number of bouquets she makes. Jill can sell all the bouquets she
wishes at the local farmers’ market for $6 per bouquet. Unfortunately, Jill’s floriculture aggravates the
allergies of her next-door neighbor, Cooper: Every bouquet that Jill grows produces 50 cents’ worth of
sneezes.
Externalities and
Public Goods
16
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222 Part 4 Beyond the Basics
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