Chapter_15_-_Answer_to_Textbook_Problems

Chapter_15_-_Answer_to_Textbook_Problems - 15 Answers to...

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15 EXTERNALITIES Answers to the Problems 1. a. The planes create a negative production externality from their noise. b. The sunset creates no externality. c. The increase in the number of people studying for graduate degrees creates a positive consumption externality. d. The perfume creates a negative consumption externality. e. The homeowner creates a positive consumption externality. f. The drunk creates a negative consumption externality. g. Presuming people like the smell of baking bread, the bakery creates a positive production externality. 2. a. 5 tons per week are produced and the marginal cost falling on the trout farmer is $167 a ton. When 5 tons a week are produced, the pesticide producer’s marginal cost is $75 a ton and the marginal benefit of pesticide is $75 a ton. At this quantity, the trout farmer’s MC from pesticide production is $167 a ton. b. 3 tons per week are produced and the pesticide producer pays the farmer $100 a ton = $300 a week. The efficient quantity is 3 tons at which marginal social cost equals marginal social benefit. If the trout farmer owns the lake, the cost of pollution can be forced back onto the pesticide producer, who when has the incentive to produce the efficient quantity. c. 3 tons per week; the rent is $1,000 minus $300 = $700 a week. The efficient quantity is 3 tons at which marginal social cost equals marginal social benefit. If the pesticide producer owns the lake, the cost of pollution is borne by the pesticide producer in the form of a decreased rent from the trout farmer. d.
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This note was uploaded on 02/09/2009 for the course ECON 2 taught by Professor Kim during the Spring '08 term at UCSD.

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Chapter_15_-_Answer_to_Textbook_Problems - 15 Answers to...

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