PROBLEMS AND APPLICATION? 1. Consider two ways to protect your car from theft. The Club (a steering wheel lock) makes it * difficult fora car thief to take your car. Lojack {a tracking system) makes it easier for the police to catch the car thief who has stolen it. Which of these types of protection conveys a negative externality on other car owners? Which conveys a positive externality? Do you think there are any policy implications of your analysis? 2. Do you agree with the following statements? Why or why not? a. “The benefits of corrective taxes as a way to reduce pollution have to be weighed against the deadweight losses that these taxes cau b. "When deciding whether to levy a corrective tax on consumers or producers, the government should be careful to levy the tax on the side of the market generating the externality 3. Decide whether each of the following events is likely to generate a positive externality, negative externality, or no extemality at all Explain. a. a barking dog in the backyard ». a party ina student's dorm room c. a student reading a novel in her apartment d. a home owner repaints his house e. a student is inoculated for measles f. a neighbor accepts a payment of $1,000 to allow his neighbor to have an outdoor party with a loud live band 4, A local drama company proposes a new sys 5. neighborhood theater in San Francisco. Before approving the building permit, the city planner completes a study of the theater's impact on the surrounding community. (© ynardes) a, One finding of the study is that theaters attract traffic, which adversely affects the community. The city planner estimates that the cost to the community from the extra traffic is $5 per ticket. What kind of an externality is this? Why? (4 rose b. Graph the market for theater tickets, labeling ¥ the demand curve, the social-value curve, the supply curve, the social-cost curve, the market equilibrium level of output, and the efficient level of output. Also show the per-unit amount of the externality. ($ voc >) 6. Ee _6/Upon further review, the city planner uncovers a second externality. Rehearsals for the plays tend to run until late at night, with actors, stagehands, and other theater members coming and going at various hours. ‘The planner has found that the increased foot traffic improves the safety of the surrounding streets, an estimated benefit to the community of $2 per ticket. What kind of externality is this? Why? (4. reo 4d, Ona new graph, illustrate the market for ~ theater tickets in the case of these two externalities. Again, label the demand curve, the social-value curve, the supply curve, the social-cost curve, the market equilibrium level of output, the efficient level of output, andthe perunit amount of both externalities. @ e, Describe a government policy that would ~ result in an efficient outcome. (4 math) Greater consumption of alcohol leads to more motor vehicle accidents and, thus, imposes costs on pedple who do not drink and drive. a, 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. On your graph, shade the area corresponding to the deadweight loss of the market equilibrium, (Hint: The deadweight loss occurs because some units of alcohol are consumed for which the social cost exceeds the social value.) Explain. Many observers believe that the levels of pollution in our society are too high. a. If society wishes to reduce overall pollution bya certain amount, why isit efficient to have different amounts of reduction at different firms? b. Command-and-control approaches often rely ‘on uniform reductions among firms. Why are these approaches generally unable to target the firms that should undertake bigger reductions? . Economists argue that appropriate corrective taxes or tradable pollution rights will result in efficient pollution reduction. How do these approaches target the firms that should undertake bigger reductions?aw b. Are the externalities associated with common resources generally positive or negative? Use examples in your answer. Is the free-market use of common resources generally greater or Tess than the efficient use? 3. Charlie loves watching Teletubbies on his local public TV station, but he never sends any money to support the station during its fund-raising drives a. What name do economists have for people like Charlie? b. How can the government solve the problem caused by people like Charlie? «. Can you think of ways the private market can solve this problem? How does the existence of cable TV alter the situation? 4. Wireless, high-speed Internet is provided for free inthe airport of the city of Communityville. 2. At first, only a few people use the service What type of a good is this and why? b. Eventually, as more people find out about the service and start using it, the speed of the connection begins to fall. Now what type of a good is the wireless Internet servic . What problem might result and why? What _, is one possible way to correct this problem? 5/Four roommates are planning to spend the weekend in their dorm room watching o movies, and they are debating how mar watch. Here is their willingness to pay for film: CS yrosths) Judd Fist fm 37 Secondfim 6 Third flim 5 4 3 Fourth fim Fifth film 1 0 0 43 thin the dorm room is the showing o movie a public good? Why or why not? (\rno®, b fit cost $10 torent a movie, how many ‘movies should the roommates rent to ‘maximize total surplus? ( trno%l)) If they choose the optimal number from part (b) and then split the cost of renting the ‘movies equally, how much surplus does each person obtain from watching the movies? (twadde> 4. Is there any way to split the cost to ensure Y that everyone benefits? What practical problems does this solution raise? Crary ‘CHAPTER 11 PUBLIC GOODS, ¢, Suppose they agree in advance to choose 'y the efficent number and to spit the cost the movies equally. When Judd is asked his willingness to pay, will he have an incentive to tell the truth? Ifso, why? If not, what will he be tempted to say? (4 male) YD What does this example teach you about the optimal provision of public goods? 6. Some economists argue that private firms will not undertake the efficient amount of basic scientific research, a, Explain why this might be so. In your answer, classify basic research in one of the, ‘categories shown in Figure 1. b, What sort of policy has the United States adopted in response to this problem? is often argued that tis policy increases the technological capability of American producers relative to that of foreign firms. Is this argument consistent with your classification of basic researc in part (a)? (Hint: Can ‘excludability apply to some potential beneficiaries of a public good and not others?) 7. There is often litter along highways but rarely in people's yards. Provide an economic explanation for this fact The town of Wiknam has 5 residents whose only activity is producing and consuming fish. ‘They produce fish in two ways. Each person who works on a fish farm raises 2 fish per day. Each person who goes fishing in the town lake catches X fish per day. X depends on N, the number of residents fishing in the lake. In particular, X=6-N, Each resident is attracted to the job that pays more fish, a. Why do you suppose that X, the productivity of each fisherman, falls as N, the number of fishermen, rises? What economic term would you use to describe the fish in the town lake? Would the same description apply to the fish from the farms? Explain. . The town’s Freedom Party thinks every individual should have the right to choose between fishing in the lake and farming without government interference. Under its policy, how many-of the residents inthe lake and how many would fish farms? How many fish are’