answerkey ch10 3ed - Answers to Text Questions and Problems...

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Answers to Text Questions and Problems Chapter 10 Answers to Review Questions 1. When a motorist enters an already congested highway, the highway becomes marginally more congested, which increases the travel time of thousands of other motorists. Excessive congestion results because individual motorists have no incentive to take these external costs into account when deciding whether to drive on the highway. 2. The socially optimal amount of highway capacity is the amount for which the marginal cost of expanding highway capacity exactly equals its marginal benefit (as measured by the value to motorists of reduced travel time). To reduce highway congestion to zero would mean building that quantity of highway for which the marginal benefit of extra capacity would be zero. But that solution cannot be socially optimal, because the marginal cost of additional highway capacity is always positive. 3. An activity that generates external costs tends to be pursued excessively. But the optimal quantity of such an activity is not zero; rather, it is that amount for which the marginal benefit of the activity equals the marginal cost, both private and external. Outlawing activities that generate external costs would thus move society from a situation in which those activities were pursued too extensively to one in which they were pursued too little. If the total cost of the unregulated activity were less than its benefit, outlawing the activity would make matters worse. 4. Because many different governments border Lake Erie, enacting legislation that curbs pollution is harder than curbing pollution of the Great Salt Lake, which is regulated by only a single government. 5. If there is a social advantage to being relatively tall, then individuals who wear high-heeled shoes will do better than others who don’t. But when everyone wears them, the relative height distribution remains unchanged. Answers to Problems 1a. True. Consider that if the marginal cost of the pollution curbed in plant A were higher than that in plant B , pollution emissions could be transferred from plant B to plant A , lowering the total cost. b. True. An example is the excessive use of pesticides on crops. This activity reduces the amount of insect damage to crops, and thus lowers the farmer’s production cost. However, the pesticide runoff pollutes waterways, imposing an external cost on recreational users of those waters. 2. (all parts) 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, as well as the magnitude of the social marginal benefit relative to the private marginal benefit. If the external cost is negligible and the external benefit is large, the result is shown in the right panel of the diagram, in which the socially optimal number of beehives, X s , exceeds the privately optimal number, X p . However, if the external cost is large relative to the external benefit, the result is shown in the left panel,
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This note was uploaded on 07/30/2011 for the course ECON 1101 taught by Professor Julia during the Three '08 term at University of New South Wales.

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answerkey ch10 3ed - Answers to Text Questions and Problems...

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