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SOLUTION PS8 - ECO 100 Problem Set#8 SOLUTIONS Do Problems...

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ECO 100 Problem Set #8 SOLUTIONS Do Problems 1, 3 and 4 on page 221 of Mankiw. 1. The Club conveys a negative externality on other car owners because car thieves will not attempt to steal a car with The Club visibly in place. This means that they will move on to another car. The Lojack system conveys a positive externality because thieves do not know which cars have this technology. Therefore, they are less likely to steal any car. Policy implications include a subsidy for car owners that use the Lojack technology or a tax on those who use The Club. 3. a. Fire extinguishers exhibit positive externalities because even though people buy them for their own use, they may prevent fire from damaging the property of others. b. The figure illustrates the positive externality from fire extinguishers. Notice that the social value curve is above the demand curve and the social cost curve is the same as the supply curve. c. The market equilibrium level of output is denoted Q market and the efficient level of output is denoted Q optimum . The quantities differ because in deciding to buy fire extinguishers, people don't account for the benefits they provide to other people. d. A government policy that would result in the efficient outcome would be to subsidize people $10 for every fire extinguisher they buy. This would shift the demand curve up to the social value curve, and the market quantity would increase to the optimum quantity.
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4. a. The externality is noise pollution. Ringo’s consumption of rock and roll music affects Luciano, but Ringo does not consider that in deciding how loud he plays his music. b. The landlord could impose a rule that music could not be played above a certain decibel level. This could be inefficient because there would be no harm done by Ringo playing his music loud if Luciano is not home. c. Ringo and Luciano could negotiate an agreement that might, for example, allow Ringo to play his music loud at certain times of the day. They might not be able to reach an agreement if the transaction costs are high or if bargaining fails because each holds out for a better deal. Problem on Congestion Externalities There are many routes by car from Burb to Metro. Each has the same vehicle operating cost, before tolls, and each takes 80 minutes of driving time except for the one Pike. The time it takes to go from Burb to Metro via the Pike is 60 + x/50 minutes, where x is the number of cars on the Pike during the period. Each commuter refuses to travel in a car with anyone else, and has timely access to a radio report indicating how many people are taking the Pike that day. Each commuter values time at a rate of $.25 per minute -- so that, for example, a commuter
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SOLUTION PS8 - ECO 100 Problem Set#8 SOLUTIONS Do Problems...

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