ch10 - Textbook Questions Answers (from the Publisher) Ch...

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Textbook Questions Answers (from the Publisher) Ch 10 Questions for Review 1. Examples of negative externalities include pollution, barking dogs, and consumption of alcoholic beverages. Examples of positive externalities include restoring historic buildings, research into new technologies, and education. (Many other examples of negative and positive externalities are possible.) 2. Figure 1 illustrates the effect of a positive externality. The equilibrium quantity provided by the market is Q market . Because of the externality, the social benefit of consumption is greater than the private benefit, so the social-benefit curve is above the demand curve. The optimal quantity for society is Q optimum . The private market produces too little of the good, as Q market is less than Q optimum . Figure 1 3. The patent system helps society solve the externality problem from technology spillovers. By giving inventors exclusive use of their inventions for a certain period, the inventor can capture much of the economic benefit of the invention. In doing so, the patent system encourages research and technological advance, which benefits society through spillover effects. 4. Externalities can be solved without government intervention through moral codes and social sanctions, charities, merging firms whose externalities affect
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each other, or by contract. 5. According to the Coase theorem, you and your roommate will bargain over whether your roommate will smoke in the room. If you value clean air more than your roommate values smoking, the bargaining process will lead to your roommate not smoking. But if your roommate values smoking more than you value clean air, the bargaining process will lead to your roommate smoking. The outcome is efficient as long as transaction costs do not prevent an agreement from taking place. The solution may be reached by one of you paying off the other either not to smoke or for the right to smoke. 6. Corrective taxes are taxes enacted to correct the effects of a negative externality. Economists prefer corrective taxes over regulations as a way to protect the environment from pollution because they can reduce pollution at a lower cost to society. A tax can be set to reduce pollution to the same level as a regulation. The tax has the advantage of letting the market determine the least expensive way to reduce pollution. The tax gives firms incentives to develop cleaner technologies to reduce the taxes they have to pay. Problems and Applications 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.
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ch10 - Textbook Questions Answers (from the Publisher) Ch...

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