This preview shows pages 1–2. Sign up to view the full content.
This preview has intentionally blurred sections. Sign up to view the full version.View Full Document
Unformatted text preview: Ch. 15 Externalities Practice Problem Answers by Charles Lin. Send any corrections to firstname.lastname@example.org November 18, 2007 #1. a. If the market is competitive and unregulated, the market will produce where Marginal Personal Bene t (MB) = Marginal Personal Cost (S, MC). Therefore, the equilibrium quantitiy will 150 units per week, and the equilibrium price will be $10 per unit. b. The e cient quantity is found by setting marginal social bene t (MSB) equal to Marginal Cost (MC). Therefore, the e cient quantity 250 units per week, and the e cient price is $15 per unit. In this case, the e cient quantity is higher than the unregulated equilibrium quantity. The deadweight loss is equal to the area of the triangle to the left of the socially e cient equilibrium, but to the right of the Q = 150 line. Therefore, the deadweight loss is equal to 1 2 (20- 10)(250- 150) = 500 . The deadweight loss is therefore $500 per week. c. To achieve e ciency, the government should set the subsidy equal to the positive externality. This is the vertical distance between the MSB and the MB curve. This distance is equal to $10 per unit. Therefore the subsidy should equal $10 per unit. d. If the e cient subsidy is implemented, the new price and output will equal the social optimum. As was calculated in part b, The e cient price is $15 per unit, and the e cient quantity is 250 units per week. The price that producers receive is $15 per unit. The price that consumers pay is $5, and the government pays a subsidy of $10. #2. a. According to the Coase Theorem, if we assume there are no hold-out problems, The smoker will pay each non-smoker at least 50 cents to agree to let the smoker smoke. However, the smoker's total payments cannot exceed $5, because this is his maximum willingness to pay. b. In this scenario, no payments will be made. The non-smokers will attempt to bribe the smoker to stop. Each of the nine nonsmokers will o er a maximum of 50 cents, for a total of $4.50. However, the smoker values the ne, luxurious smoke of a cigar at $5, and so will refuse to stop smoking. In both scenarios (a and b), the outcome is the same - the smoker will end up smoking, because...
View Full Document