Krugman_SolMan_CH19

Krugman_SolMan_CH19 - Krugman_SolMan_CH19 11/11/04 4:40 PM...

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chapter Externalities 1. a. This is a positive externality: since other people enjoy looking at Mrs. Chau’s flow- ers, the marginal social benefit of looking at the flowers is greater than the mar- ginal benefit to Mrs. Chau of looking at them. As a result, fewer flowers will be planted than is socially optimal. b. This is a positive externality: since additional shoppers lead to additional business for other stores in the mall, the store’s decision to locate there confers external benefits on other stores. The marginal social benefit is greater than the marginal benefit to Anna Crombie and Fritz alone. Since Anna Crombie and Fritz do not take the external benefit into account in their decision making, they will open fewer stores in malls than is socially optimal. c. This is a negative externality: since you cannot study, an external cost is imposed on you. That is, the marginal social cost is greater than the marginal cost incurred by the fraternity. Since the fraternity does not take this external cost into account, there will be more music played (or the music will be louder) than is socially optimal. d. This is a positive externality: since bees pollinate her neighbor’s apple trees and there- fore confer an external benefit on the owner of the apple orchard, the marginal social benefit is greater than the marginal benefit to Maija. Since Maija does not take the external benefit into account, she will keep fewer bees than is socially optimal. e. This is a negative externality: the burning of gasoline produces toxic gases that impose an external cost on others. The marginal social cost is greater than the marginal cost incurred by Justine. As a result, more people will purchase SUVs than is socially optimal. 2. a. The accompanying diagram shows the marginal social cost curve and the marginal social benefit curve of music. The socially optimal volume of music is the volume at which marginal social benefit and marginal social cost are equal (point O in the diagram). This is the case at a volume of 95 dB. 147 19 Marginal social cost, marginal social benefit of dB Volume of music (dB) MSB O T M MSC 91 90 93 92 95 94 97 96 $36 30 24 18 12 9 6 3 0 Since the members of the sorority do not bear any of the social cost of playing loud music, they will play music up to the volume where the marginal social ben- efit is zero (point M in the diagram). This is at a volume of 96.5 dB. Krugman_SolMan_CH19 11/11/04 4:40 PM Page 147
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c. If the college imposes a Pigouvian tax of $3 per decibel, the sorority now faces a marginal cost of playing music of $3. They will therefore play music up to the vol- ume where the marginal social benefit is just equal to $3 (point T in the dia- gram). This is at a volume of 96 dB. This is not the optimal quantity of music, so this is not an optimal Pigouvian tax.
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Krugman_SolMan_CH19 - Krugman_SolMan_CH19 11/11/04 4:40 PM...

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