week8

Question 1

External cost (same thing for external benefit)

Answer 1

= total social cost - total private cost

what’s between SMC and PMC curve
or
What’s under Externality curve

Question 2

4 possibilities of curve placement

Answer 2

Negative production externality: SMC above PMC curve
Positive production externality: SMC below PMC curve
Negative consumption externality: SMB below PMB
Positive consumption externality: SMB above PMB

Question 3

Problems with coasian solutions

Answer 3

• assignment problem: assigning the blame
• holdout problem: shared ownership of property rights gives each owner power over all others
• free rider problem: when an investment has a personal cost but a common benefit, will underinvest
• transaction costs and negotiating problems: large to negotiate when large numbers of individuals

Question 4

Coasian solutions

Answer 4

externalities can sometimes be internalized
provides the competitive market model with a defense against the onslaught of market failures
won’t help with large-scale global externalities

Question 5

Public sector remedies for externalities (negative)

Answer 5

1. Corrective taxation to discourage the use
2. Subsidies to encourage the use
3. Regulation to directly change use

Question 6

Corrective taxation and subsidies

Answer 6

Change the private marginal cost/benefit without affecting the social marginal cost/benefit
Can be used to internalize externality

Question 7

Corrective taxation

Answer 7

Original situation: Q1 > Q*: over-consumption of a good
Set tax = externality

Optimal situation obtained with the tax (shift demand curve down)

Question 8

Corrective subsidies

Answer 8

Original situation: Q1 < Q*: under-consumption of a good
Set subsidy = externality

Optimal situation obtained with the subsidy (shift demand curve up until it’s the same as SMB)