Homework 7 Answer Key a b c d a b d Notes Correct answers highlighted in green explanation provided when deemed necessary Q1 Which of the following statements about a well maintained yard best conveys the general nature of the externality A well maintained yard conveys a positive externality because it increases the home s A well maintained yard conveys a negative externality because it increases the property a market value b tax liability of the owner A well maintained yard conveys a positive externality because it increases c the value of adjacent properties in the neighborhood d A well maintained yard cannot provide any type of externality If an aluminum manufacturer does not bear the entire cost of the smoke it Q2 emits it will emit a lower level of smoke than is socially efficient emit a higher level of smoke than is socially efficient emit an acceptable level of smoke not emit any smoke in an attempt to avoid paying the entire cost Q3 Research into new technologies provides a negative externality and too few resources are devoted to research as a result negative externality and too many resources are devoted to research as a result positive externality and too few resources are devoted to research as a c result positive externality and too many resources are devoted to research as a result Q4 If a sawmill creates too much noise for local residents noise restrictions will force residents to move out of the area a sense of social responsibility will cause owners of the mill to reduce noise levels the government can raise economic well being through noise control the government should avoid intervening because the market will allocate resources a b c regulations d efficiently Q5 Consider the diagram below representing the market for some good Which price and quantity combination represents the social optimum P0 and Q1 P2 and Q1 P1 and Q0 P2 and Q0 a b c d a b c d Q6 Again consider the diagram in question 5 Which of the following statements is correct The marginal benefit of the positive externality is measured by P3 P1 The marginal cost of the negative externality is measured by P3 P2 The marginal cost of the negative externality is measured by P3 P1 The marginal cost of the negative externality is measured by P3 P0 Explanation The cost of the negative externality is equal to the vertical difference between the social cost curve and the private cost curve That is we have to compare the social cost with the private cost at the same quantity We can do this at either Q1 or Q0 At Q1 the difference is P2 P0 while at Q0 the difference is P3 P1 These two values are equal to one another however only the last one appears as an option c which is the correct answer Q7 Which of the following statements is correct Internalizing a negative externality will cause an industry to decrease the quantity it a supplies to the market and decrease the price of the good produced Internalizing a negative externality will cause an industry to decrease the b quantity it supplies to the market and increase the price of the good produced Internalizing a negative externality will cause an industry to increase the quantity it c supplies to the market and decrease the price of the good produced Internalizing a negative externality will cause an industry to increase the quantity it d supplies to the market and increase the price of the good produced Explanation Internalizing a negative externality means that the producer takes into account the external cost that its decisions produce If the producer s cost is higher it is willing to produce less at any price which means that it will decrease its supply to the market resulting in an increase in price Q8 Consider the diagram below representing the market for some good There is a positive negative positive externality in this market The value cost value of this externality per unit of the good is 4 The equilibrium price of the good in the market is 8 while the equilibrium quantity is 8 The socially optimal quantity of the good is 10 units The value to society of that unit is 10 Total welfare would increase by 4 if the externality were internalized by decision makers Explanation Similar to what we did for question 6 for cost we measure the externality by taking the vertical difference between social and private value We are given the necessary DemandSocial ValueSupply1234567891011121314151617Quantity2468101214161820Price information to do this when Q 8 social value is 12 while private value measured by demand is 8 The difference is 4 Total welfare increases by the size of the triangle that was the DWL from the externality the All of the other answers can be easily area of that triangle is given by obtained from the figure Q9 University researchers create a positive externality because what they discover in their research labs can easily be learned by others who haven t contributed to the research costs If there are no subsidies what is the relationship between the equilibrium quantity of university research and the optimal quantity of university re search produced They are equal The equilibrium quantity is greater than the socially optimal quantity The equilibrium quantity is less than the socially optimal quantity There is not enough information to answer the question Q10 Suppose that an MBA degree creates no externality because the benefits of an MBA are internalized by the student in the form of higher wages If the government offers subsidies for MBAs then which of the following statements is correct a The equilibrium quantity of MBAs will equal the socially optimal quantity of MBAs The equilibrium quantity of MBAs will be greater than the socially optimal b quantity of MBAs c MBAs The equilibrium quantity of MBAs will be less than the socially optimal quantity of d There is not enough information to answer the question Explanation If an MBA creates no externalities that private value and social value are the same and correspond to the demand curve The market equilibrium therefore produces the socially optimal amount of MBA degrees A subsidy however increases students demand for MBA programs pushing demand to the right This results in an increase in the equilibrium quantity of MBAs and therefore in that number being larger than the social optimum a b c d Q11 Since almost all forms of transportation produce some type of pollution the government should ban all transportation the government should ban all pollution society has to weigh the cost and benefits