Questions and Problems

Check Your Understanding

1. Question

   When trying to estimate the external benefits of a college education, what kinds of specific benefits would you include?

   Prob 13 1. When trying to estimate the external benefits of a college education, what kinds of specific benefits would you include?

2. Question

   How might the government use market forces to encourage recycling?

   Prob 13 2. How might the government use market forces to encourage recycling?

3. Question

   What makes public goods so different from private goods?

   Prob 13 3. What makes public goods so different from private goods?

4. Question

   Why wouldn’t a rural highway in Montana, Freeway 405 in Los Angeles, and the New Jersey Turnpike (toll) all be classified as public goods? Which would be most like a public good and which would be least?

   Prob 13 4. Why wouldn’t a rural highway in Montana, Freeway 405 in Los Angeles, and the New Jersey Turnpike (toll) all be classified as public goods? Which would be most like a public good and which would be least?

5. Question

   Assume that you are convinced that if something isn’t done now, global warming is going to create extensive problems and damage at the end of this century. If you were preparing a cost-benefit analysis of the impacts and had a 100-year horizon for your projections, would you use a 3% or an 8% discount rate?

   Prob 13 5. Assume that you are convinced that if something isn’t done now, global warming is going to create extensive problems and damage at the end of this century. If you were preparing a cost-benefit analysis of the impacts and had a 100-year horizon for your projections, would you use a 3% or an 8% discount rate?

6. Question

   What is the tragedy of the commons? How can it be solved?

   Prob 13 6. What is the tragedy of the commons? How can it be solved?

Apply the Concepts

7. Question

   “Internalizing” the cost of negative externalities means that we try to set policies that require each product to include the full costs of its negative spillovers in its price. How do such policies affect product price and industry output and employment? Are these kinds of policies easy to implement in practice? How has globalization of production affected our ability to control pollution?

   Prob 13 7. “Internalizing” the cost of negative externalities means that we try to set policies that require each product to include the full costs of its negative spillovers in its price. How do such policies affect product price and industry output and employment? Are these kinds of policies easy to implement in practice? How has globalization of production affected our ability to control pollution?

8. Question

   As a way to increase the funds for wildlife conservation, why don’t we just auction off (say, on eBay) the right to name a new species when it is discovered? Why not do the same for existing species?

   Prob 13 8. As a way to increase the funds for wildlife conservation, why don’t we just auction off (say, on eBay) the right to name a new species when it is discovered? Why not do the same for existing species?

9. Question

   We can estimate the emissions caused in one year from automobile use. What can you do to offset these emissions? Buy a green tag. These voluntary purchases are akin to carbon offsets traded in Europe. For a small fee, individuals can purchase carbon offsets for their cars or SUVs, or companies can use them as a way to purchase wind power for their stores. Organizations selling the green tag (both for-profit and not-for-profit) provide a decal; most of the fee collected is provided to alternative energy producers as a subsidy, which then can lower their prices to the market to encourage use. Is this a public good being sold privately? Why would individuals or businesses buy a tag when they can free-ride?

   Prob 13 9. We can estimate the emissions caused in one year from automobile use. What can you do to offset these emissions? Buy a green tag. These voluntary purchases are akin to carbon offsets traded in Europe. For a small fee, individuals can purchase carbon offsets for their cars or SUVs, or companies can use them as a way to purchase wind power for their stores. Organizations selling the green tag (both for-profit and not-for-profit) provide a decal; most of the fee collected is provided to alternative energy producers as a subsidy, which then can lower their prices to the market to encourage use. Is this a public good being sold privately? Why would individuals or businesses buy a tag when they can free-ride?

10. Question

    Garbage dumps are a particular source of a potent global-warming gas, the methane that bubbles up as the garbage decomposes. Does it make sense for companies in the European Union to help Brazilian garbage dumps reduce their releases of methane as a way of meeting their Kyoto obligations?

    Prob 13 10. Garbage dumps are a particular source of a potent global-warming gas, the methane that bubbles up as the garbage decomposes. Does it make sense for companies in the European Union to help Brazilian garbage dumps reduce their releases of methane as a way of meeting their Kyoto obligations?

11. Question

    The Presidio, previously a military base in San Francisco, is now a national park. It sits in the middle of San Francisco on some of the most valuable real estate in the United States. Congress, when it created the park, required that it rehabilitate the aging buildings and be self-sufficient within a decade or so, or the land would be sold off to developers. The park appears to be well on its way to self-sufficiency by leasing the land to private firms—Lucas Films has built a large digital animation studio, and other firms have undertaken similar projects. These projects all must maintain the general character of the park and generate rent that will cover the park’s expenses in the future. Would this privatization approach work with most of America’s other national parks? Why or why not?

    Prob 13 11. The Presidio, previously a military base in San Francisco, is now a national park. It sits in the middle of San Francisco on some of the most valuable real estate in the United States. Congress, when it created the park, required that it rehabilitate the aging buildings and be self-sufficient within a decade or so, or the land would be sold off to developers. The park appears to be well on its way to self-sufficiency by leasing the land to private firms—Lucas Films has built a large digital animation studio, and other firms have undertaken similar projects. These projects all must maintain the general character of the park and generate rent that will cover the park’s expenses in the future. Would this privatization approach work with most of America’s other national parks? Why or why not?

12. Question

    Nobel Prize–winner Simon Kuznets once suggested that poor nations tend to pollute more as they grow—until they reach a certain level of income per capita—after which they pollute less. Does this observation by Kuznets seem reasonable? Why or why not?

    Prob 13 12. Nobel Prize–winner Simon Kuznets once suggested that poor nations tend to pollute more as they grow—until they reach a certain level of income per capita—after which they pollute less. Does this observation by Kuznets seem reasonable? Why or why not?

In the News

13. Question

    In 2009, the Cash for Clunkers program was initiated to encourage consumers to trade in their old inefficient cars for a credit to buy new fuel-efficient cars. What are some of the external benefits from such a policy?

    Prob 13 13. In 2009, the Cash for Clunkers program was initiated to encourage consumers to trade in their old inefficient cars for a credit to buy new fuel-efficient cars. What are some of the external benefits from such a policy?

14. Question

    One’s home (whether a house or an apartment) is typically thought of as one’s castle. But not so in the condominiums with homeowners associations (HOAs) in Jefferson County, Colorado. In an older four-unit condo, the HOA voted 3–1 to adopt a no-smoking rule (inside the individual condos) after smokers bought one of the units and smoke permeated the walls of the structure. In 2006, a district judge ruled that the HOA’s adoption of no-smoking rules was a reasonable restriction on ownership rights, stating that the rules were designed to prevent the odor of cigarettes from penetrating the walls of neighboring condos.
    
    Considering that there are a small number of people involved (three nonsmoking units, one smoking), you would think that transaction costs would be minimal. Why do you think the homeowners could not work out an agreement (à la Coase) and ended up in court? According to the Coase theorem, would it have made any difference if the judge had ruled against the HOA?

    Prob 13 14. One’s home (whether a house or an apartment) is typically thought of as one’s castle. But not so in the condominiums with homeowners associations (HOAs) in Jefferson County, Colorado. In an older four-unit condo, the HOA voted 3–1 to adopt a no-smoking rule (inside the individual condos) after smokers bought one of the units and smoke permeated the walls of the structure. In 2006, a district judge ruled that the HOA’s adoption of no-smoking rules was a reasonable restriction on ownership rights, stating that the rules were designed to prevent the odor of cigarettes from penetrating the walls of neighboring condos.
    Considering that there are a small number of people involved (three nonsmoking units, one smoking), you would think that transaction costs would be minimal. Why do you think the homeowners could not work out an agreement (à la Coase) and ended up in court? According to the Coase theorem, would it have made any difference if the judge had ruled against the HOA?

Solving Problems

15. Question

    Suppose the market demand and supply for flu shots is shown in the figure below. Not taking into account the external benefits from flu shots, what is the equilibrium price and quantity of flu shots? Now suppose that every flu shot generates $10 in external benefits (from others being less likely to get sick). Show how this positive externality affects the graph (draw in a new curve). Taking into account external benefits, what would be the new equilibrium price and quantity of flu shots?

    
    
    
    

    Prob 13 15. Suppose the market demand and supply for flu shots is shown in the figure below. Not taking into account the external benefits from flu shots, what is the equilibrium price and quantity of flu shots? Now suppose that every flu shot generates $10 in external benefits (from others being less likely to get sick). Show how this positive externality affects the graph (draw in a new curve). Taking into account external benefits, what would be the new equilibrium price and quantity of flu shots?

16. Question

    Suppose that the individual demand schedules for Al and Jane, the only two residents on a quiet city street, are shown in the table for speed bumps aimed at slowing cars passing through. In a single diagram, plot Al and Jane’s individual demand curve, and then plot the total demand curve for each unit of the public good.

    
    
    
    

    Prob 13 16. Suppose that the individual demand schedules for Al and Jane, the only two residents on a quiet city street, are shown in the table for speed bumps aimed at slowing cars passing through. In a single diagram, plot Al and Jane’s individual demand curve, and then plot the total demand curve for each unit of the public good.

17. Question

    According to By the Numbers, between which two years did total sales of hybrid cars increase the most? What factors might have led to this rise in hybrid sales?

    Prob 13 17. According to By the Numbers, between which two years did total sales of hybrid cars increase the most? What factors might have led to this rise in hybrid sales?

18. Question

    According to By the Numbers, which two waste products are most recovered (recycled) by percentage, and which two waste products are least recovered?

    Prob 13 18. According to By the Numbers, which two waste products are most recovered (recycled) by percentage, and which two waste products are least recovered?