chap10-answers

chap10-answers - Chapter 10 Externalities 10 EXTERNALITIES...

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197 Questions for Review 1. Examples of negative externalities include pollution, barking dogs, and consumption of alcoholic beverages (many others are possible). Examples of positive externalities include restoring historic buildings, research into new technologies, and education (many others are possible). 2. Figure 1 illustrates the effect of a negative externality. The equilibrium quantity provided by the market is Q market . Because of the externality, the social cost of production is greater than the private cost of production, so the social-cost curve is above the supply curve. The optimal quantity for society is optimum . The private market produces too much of the good, as market is greater than optimum . Figure 1 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. EXTERNALITIES 10
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198 ) Chapter 10/Externalities 6. Pigovian taxes are taxes enacted to correct the effects of a negative externality. Economists prefer Pigovian 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.
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This note was uploaded on 02/15/2012 for the course ECON 102 taught by Professor ? during the Winter '08 term at Waterloo.

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chap10-answers - Chapter 10 Externalities 10 EXTERNALITIES...

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