econ1001_endofchapter11

econ1001_endofchapter11 - Chapter 11 Externalities and...

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Chapter 11 Externalities and Property Rights

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Problem #1, Chapter 11 Determine whether the following statements are true or false, and briefly explain why A) A given total emission reduction in a polluting industry will be achieved at the lowest possible total cost when the cost of the last unit of pollution curbed is equal for each firm in the industry B) In an attempt to lower their costs of production, firms sometimes succeed merely in shifting costs to outsiders
Solution to Problem #1 (1) A) True Application of Equal Marginal Principle For optimal allocation of production, marginal cost should be the same across all the firms If one firm’s marginal cost is higher than the other’s, it is cost- minimizing to divert the production from the firm with a higher marginal cost to the firm with a lower marginal cost

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Solution to Problem #1 (2) B) True Notion of Negative Externality It refers to situation where producers do not bear the complete production cost and the leakage is borne by a three-party outside the market Consider an example of production that generates sewage The sewage is supposed to be collected by a municipal government at a per unit charge However, the manufacturer escapes from the discharge fee by pumping the sewage into a river The river gets polluted and the society then bears an extra pollution cost
Chapter 11, Problem 2 2) 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
b) 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
d) Indicate the socially optimal quantity of beehives on your diagram, Is it higher or lower than the privately optimal quantity? Explain. It depends.

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This note was uploaded on 10/14/2010 for the course ECON ECON1001 taught by Professor Ka-fuwong during the Spring '10 term at HKU.

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econ1001_endofchapter11 - Chapter 11 Externalities and...

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