Fall Term 2003 - Oya Cesur Demir



Fall Term 2017 Yaşar University

Introduction to Economics I (Econ 101)

Problem Sheet 8

CH 10: Externalities and CH 11:Public Goods and Common Resources

1. Greater consumption of alcohol leads to more motor vehicle accidents and, thus, imposes costs on people who do not drink and drive.

Illustrate the market for alcohol, labeling the demand curve, the social value curve, the supply curve, the social-cost curve, the market equilibrium level of output, and the efficient level of output.

2. Consider the market for fire extinguishers.

a) Why might fire extinguishers exhibit positive externalities?

b) Draw a graph of the market for fire extinguishers, labeling demand curve, the social value curve, the supply curve and the social-cost curve.

c) Indicate the market equilibrium level of output and the efficient level of output.

d) If the external benefit is $10 per extinguisher, describe a government policy that would result in the efficient outcome.

3. Rival?

Yes No

|Private Goods |Natural Monopolies |

|Common Resources |Public Goods |

Yes

Excludable?

No

Given the table, place each of the following in the correct location in the table.

a. Congested toll roads

b. Knowledge

c. Fish in the ocean

d. National defense

e. Congested nontoll roads

f. Cable TV

g. The environment

i. Ice-cream cones

j. Uncongested toll roads

k. Clothing

l. Uncongested nontoll roads

4. The creation of knowledge is a public good. Because knowledge is a public good, profit-seeking firms tend to free-ride on the knowledge created by others and, as a result, devote too few resources to the creation of knowledge. How does the U.S. government correct for this apparent market failure?

5. The government often intervenes when private markets fail to provide an optimal level of certain goods and services. For example, the government imposes an excise tax on gasoline to account for the negative externality that drivers impose on one another. Why might the private market not reach the socially optimal level of traffic on the road without the help of government?

True/False

6. When a transaction between a buyer and seller directly affects a third party, the effect is called an externality.

7. In a market characterized by externalities, the market equilibrium fails to maximize the total benefit to society as a whole.

8. The government can internalize an externality by taxing goods that have negative externalities and subsidizing goods that have positive externalities.

9. According to the Coase theorem, if private parties can bargain without cost, then the private market will always solve the problem of externalities.

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