Economics 101
Fall 2001
Practice Questions #10
Question 1:
Identify whether the following are positive consumption
externalities, negative consumption externalities, positive production
externalities, or negative production externalities:
- Your neighbor
listens to music loudly in his own apartment.
- Your
neighbor hires a leaf blower to get rid of the leaves on the street.
- One of
your fellow students puts together her lecture notes while studying for
the exam and lets you xerox them.
- The
farmers in the rural areas of Turkey burn the forests on purpose to clear
land for their agricultural activities.
- One of
the two factories, which are located adjacent to each other by a river and
pollute it, decides to clean up the river as a result of new government
regulations and thinks of using this as a part of its new ad campaign.
Question 2:
Bob, Ed and Jane live on Short Street. They
decided to build a small park at the corner of the street right by the lake.
They each have a different demand curve for the park given by the following
equations:
Bob:
P = 60 – Q
Ed: P = 45 – Q
Jane:
P = 45 – 2Q
The marginal cost of building the park is
given by MC = Q where Q represents the area in terms of square
feet that will be allocated for the park.
- What is the optimal area to be allocated for the park?
- What is the total price paid to provide the park?
- Of this price, Bob will pay ______ , Ed will pay ______ , and Jane
will pay ______ .
- Will this optimal amount of the public good necessarily be
provided by the residents of Short Street? Explain.
Question 3:
Watertown is a small town surrounded by many small lakes.
The major economic activity in town is ice fishing and during winter, people
from other towns in the area come to Watertown for ice fishing. The town
council decides to sell ice fishing rights to extract some revenues and to
discourage some of the ice-fishing activity since this activity is damaging the
ecosystem. It is estimated that the demand for these rights is given by the
following equation: P = 250 – Q while the marginal cost of
issuing the rights by the council is given by MC = Q.
- Comment
on whether there exists any inefficiency in ice fishing before the rights
were issued.
- Find
the equilibrium price and quantity for ice-fishing rights.
- One of
the members of the council, Mr. Smith, thinks that there are external
costs involved with selling the rights to ice fishing. He claims that
before the rights were sold, there were more people coming to Watertown
for ice fishing and this was very helpful for the local merchants. He
estimates that because the rights discourage people from coming to town,
the net loss of merchants amount to 10 + Q. Considering the market
for ice-fishing rights, is this a consumption externality or a production
externality?
- Assuming
Mr. Smith’s estimate is correct, find the socially efficient quantity and
price of ice fishing rights.
Question 4:
Which of the following statements is TRUE?
- A
positive consumption externality arises when marginal social benefit is
greater than marginal private benefit.
- A
negative consumption externality arises when marginal social benefit is
lower than marginal private benefit.
- A
positive production externality arises when marginal social cost is lower
than marginal private cost.
- A
negative production externality arises when marginal social cost is
greater than marginal private cost.
- All
of the above.
Question 5:
Overfishing in the oceans can be
eliminated by
- assigning
long-term exclusive rights for fishing.
- issuing
marketable permits for fishing.
- taxing
fishing boats.
- Both
(B) and (C).
- (A),
(B), and (C).
Question 6:
If there is a negative production
externality in the market for good X, then
- good
X should never be produced.
- good
X will be underproduced in the market.
- good
X will be overproduced in the market.
- the
government should give a subsidy to the producers of good X.
- the
government should subsidize the consumers of good X.