Principles_OTHERsolution_ch10 - Suggested Answers for...

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Suggested Answers for Mankiw, Chapter 10, “Other” Problems 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. 2. a. The statement, "The benefits of corrective taxes as a way to reduce pollution have to be weighed against the deadweight losses that these taxes cause," is false. In fact, corrective taxes reduce the inefficiency of pollution by reducing the quantity of the good being produced that has pollution as a by-product. So, corrective taxes reduce deadweight loss; they do not increase it. b. The statement, "When deciding whether to levy a corrective tax on consumers or producers, the government should be careful to levy the tax on the side of the market generating the externality," is inaccurate. It does not matter on whom the tax is imposed the incidence of the tax will be identical. So whether the externality is caused by the seller or the buyer of a good, a tax on either producers or consumers will lead to the same reduction of quantity and change in the prices producers receive or consumers pay. Figure 2
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This note was uploaded on 04/23/2010 for the course ECONOMICS 2312 taught by Professor William during the Spring '09 term at 東京大学.

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Principles_OTHERsolution_ch10 - Suggested Answers for...

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