sol_even_12

sol_even_12 - Chapter 12 Externalities and Property Rights...

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Chapter 12 Externalities and Property Rights Q. 2, 4, 6, 8, 10
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Chapter 12, Problem 2 1) Phoebe keeps a bee farm next door to an apple orchard.  She  chooses her optimal number of beehives by selecting the honey  output level at which her private marginal benefit from beekeeping  equals her private marginal cost.
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a)  Assume that Phoebe’s private marginal benefit and marginal cost  curves from beekeeping are normally shaped.  Draw a diagram of  them.   No external cost and benefit is involved. The equilibrium price and quantity is socially optimal. $/hive Number of beehives Private MC Private MB
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a) Phoebe’s bees help to pollinate the blossoms in the apple orchard,  increasing the fruit yield.  Show the social marginal benefit from  Phoebe’s beekeeping in your diagram. External benefit (positive externality) is involved in this case. $/hive Number of beehives Private MC Private MB Social MB DWL
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c)  Phoebe’s bees are Africanized killer bees that aggressively sting  anyone who steps into their flight path.  Phoebe, fortunately, is  naturally immune to the bees’ venom.  Show the social marginal  cost curve from Phoebe’s beekeeping in your diagram. $/hive Number of beehives Private MC Private MB External cost (negative externality) is involved in this case. Social MC
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a) Indicate the socially optimal quantity of beehives on your diagram,   Is it higher or lower than the privately optimal quantity?  Explain. It depends. The socially optimal number of beehives could be greater or less  than the privately optimal number. - depending on the magnitude of the social marginal cost relative to  the private marginal cost. - depending on the magnitude of the social marginal benefit relative to the private marginal benefit.
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If the negative externality is negligible and the positive externality is  large: $/hive Number of beehives Private MC Private MB Social MB Social MC Q soc Q pvt The socially optimal number of beehives, Q soc , exceeds the privately optimal number, Q pvt.
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If the negative externality is large and the positive externality is  negligible: $/hive Number of beehives Private MC Private MB Social MB Social MC Q soc Q pvt The socially optimal number of beehives, Q soc , is smaller than the privately optimal number, Q pvt.
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4)  Refer to problem 3.  How would the imposition of a tax of $3 per unit  on each daily boom box rental affect efficiency in this market? Chapter 12, Problem 4
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The imposition of a $3 per unit tax is efficiency-enhancing Why? It actually internalizes the noise cost into the private supply curve.
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sol_even_12 - Chapter 12 Externalities and Property Rights...

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