problem set answers 5

problem set answers 5 - Dr. Seiji Steimetz ECON 101 ANSWERS...

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Dr. Seiji Steimetz ECON 101 Department of Economics California State University, Long Beach Page 1 of 9 A NSWERS FOR P ROBLEM S ET 6 Chapter 5 LEARNING OBJECTIVE LEARNING OBJECTIVE 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency. Review Questions 1.1 An externality is a benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service. Examples of positive externalities include a) the benefits received by a passerby who enjoys a beautiful garden and b) the benefits from a college education that go to one’s children, grandchildren, co-workers, or complete strangers. Examples of negative externalities include a) the noise from a loud party or from a jetliner, and b) the pollution emitted from a factory. 1.2 The private cost of producing a good will differ from the social cost when there is a negative externality. For example, the private cost of producing electricity includes the costs of the fuel and running the power plant, but the social cost also adds the costs of the pollution emitted – which can reduce visibility and cause health problems. The private benefit of consuming a good differs from the social benefit when there is a positive externality. For example, the private benefits from your college education include your enjoyment of the experience and the increase in income you’ll receive, but the social benefits add the benefits to third parties, such as your potential co-workers’ improved productivity because you know more, or the gains to people who receive more services from the government because you earn more and pay more taxes. 1.3 Economic efficiency occurs when the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production, and where the sum of consumer surplus and producer surplus is maximized. Externalities generally reduce economic efficiency because buyers and firms ignore the external cost or benefit, which leads firms to either overproduce the good if there is an external cost, or underproduce the good if there is an external benefit. 1.4 Market failure is the failure of the market to produce the efficient level of output. Externalities, public goods, and common resources all cause market failure (as does monopoly, which you’ll learn about in a later chapter). 1.5 Externalities generally arise because of incomplete property rights or from the difficulty in enforcing property rights. Problems and Applications 1.6 Under these circumstances, consumption of Big Macs causes a negative externality. These types of externalities exist in the consumption of many products. There has recently been a debate over whether the health effects of high-fat fast food justifies government intervention. Ironically, the person with health problems due to a lifetime of burger consumption didn’t cause taxpayers to suffer an externality until the government created Medicare. In some sense, the government created the externality by taking the cost upon itself.
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Dr. Seiji Steimetz
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This note was uploaded on 02/11/2010 for the course ECON 101 taught by Professor Steimetz during the Fall '08 term at CSU Long Beach.

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problem set answers 5 - Dr. Seiji Steimetz ECON 101 ANSWERS...

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