101_PS12_ans_03 - Answers to Problem Set 12 Answers to...

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Answers to Problem Set 12 Answers to Review Questions 1. When a motorist enters an already congested freeway, the freeway becomes marginally more congested, which increases the travel time of thousands of other motorists. Excessive congestion results because individual motorists have no incentive to take these external costs into account when deciding whether to drive on the freeway. 2. The socially optimal amount of freeway capacity is the amount for which the marginal cost of expanding freeway capacity exactly equals its marginal benefit (as measured by the value to motorists of reduced travel time). To reduce freeway congestion to zero would mean building that quantity of freeway for which the marginal benefit of extra capacity would be zero. But that solution cannot be socially optimal, because the marginal cost of additional freeway capacity is always positive. 3. An activity that generates external costs tends to be pursued excessively. But the optimal quantity of such an activity is not zero; rather, it is that amount for which the marginal benefit of the activity equals the marginal cost, both private and external. Outlawing activities that generate external costs would thus move society from a situation in which those activities were pursued too extensively to one in which they were pursued too little. If the total cost of the unregulated activity were less than its benefit, outlawing the activity would make matters worse. 4. Because many different governments border Lake Erie, enacting legislation that curbs pollution is harder than curbing pollution of The Great Salt Lake, which is regulated by only a single government. 5. If there is a social advantage to being relatively tall, then individuals who wear high-heeled shoes will do better than others who don’t. But high-heeled shoes also entail costs, and when everyone wears them, the relative height distribution remains unchanged. Answers to Problems
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This note was uploaded on 03/27/2008 for the course ECON 1110 taught by Professor Wissink during the Spring '06 term at Cornell.

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101_PS12_ans_03 - Answers to Problem Set 12 Answers to...

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