ONLINECO 

Solution Chapter 10. Exercises 1-6. Externalities. Principles of economics. Gregory Mankiw.

 

1. Do you agree with the following statements? Why or why not?A. “The benefits of Pigovian taxes as a way to reduce pollution have to be weighed against the deadweight losses that these taxes cause.” b. “A negative production externality calls for a Pigovian tax on producers, whereas a negative consumption externality calls for a pigovian tax on consumers”

 

2. Consider the market for fire extinguishers.a. Why might fire extinguishers exhibit positive externalities in consumption? b. Draw a graph of the market for fire extinguishers, labeling the demand curve, 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. Give an intuitive explanation for why these quantities differ. d. If the external benefit is $10 per extinguisher,, describe a government policy that would result in the efficient outcome.

 

3. Contributions to charitable organizations are deductible under the federal income tax. In what way does this government policy encourage private solutions to externalities?

 

4. Ringo loves playing rock and roll music at high volumen. Luciano loves opera and hates rock and roll. Unfortunately, they are next-door neighbors in an apartment building with paper-thin walls.A. What is the externality here? B. What command-and control policy might the landlord impose? Could such a policy lead to an inefficient outcome? C. Suppose the landlord lets the tenants do whatever they want. According to the Coase theorem, how might Ringo and Luciano reach an efficient outcome on their own? What might prevent them from reaching an efficient outcome?

 

5. It is rumored that the Swiss government subsidizes cattle farming, and that the subsidy is larger in áreas with more tourist attractions. Can you think of a reason why this policy might be efficient?

 

6. Greater consumption of alcohol leads to more motor vehicle accidents and, thus, imposes costs on people 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. b. 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.