1.What type of externality (positive or negative) is present in each of the following examples? Is the marginal social benefit of the activity greater than or equal to the marginal benefit to the individual? Is the marginal social cost of the activity greater than or equal to the marginal cost to the individual? Without intervention, will there be too little or too much (relative to what would be socially optimal) of this activity?

2.The loud music coming from the sorority next to your dorm is a negative externality that can be directly quantified. The accompanying table shows the marginal social benefit and the marginal social cost per decibel (dB, a measure of volume) of music.

3.Many dairy farmers in California are adopting a new technology that allows them to produce their own electricity from methane gas captured from animal wastes. (One cow can produce up to 2 kilowatts a day.) This practice reduces the amount of methane gas released into the atmosphere. In addition to reducing their own utility bills, the farmers are allowed to sell any electricity they produce at favorable rates.

4.According to a report from the U.S. Census Bureau, “the average [lifetime] earnings of a full-time, year round worker with a high school education are about $1.2 million compared with $2.1 million for a college graduate.” This indicates that there is a considerable benefit to a graduate from investing in his or her own education. Tuition at most state universities covers only about two-thirds to three-quarters of the cost, so the state applies a Pigouvian subsidy to college education.

If a Pigouvian subsidy is appropriate, is the externality created by a college education a positive or a negative externality? What does this imply about the differences between the costs and benefits to students compared to social costs and benefits? What are some reasons for the differences?

5.The city of Falls Church, Virginia, subsidizes trees planted in homeowners’ front yards when they are within 15 feet of the street.

6.Smoking produces a negative externality because it imposes a health risk on others who inhale second-hand smoke. Cigarette smoking also causes productivity losses to the economy due to the shorter expected life span of a smoker. The U.S. Centers for Disease Control and Prevention (CDC) has estimated the average social cost of smoking a single pack of cigarettes for different states by taking these negative externalities into account. Assume that the accompanying table provides the price of cigarettes and the estimated average social cost of smoking in five states.

7.Fishing for sablefish has been so intensive that sablefish were threatened with extinction. After several years of banning such fishing, the government is now proposing to introduce tradable vouchers, each of which entitles its holder to a catch of a certain size. Explain how fishing generates a negative externality and how the voucher scheme may overcome the inefficiency created by this externality.

8.Which of the following are characterized by network externalities? Which are not? Explain.

9.The government is involved in providing many goods and services. For each of the goods or services listed, determine whether it is rival or nonrival in consumption and whether it is excludable or nonexcludable. What type of good is it? Without government involvement, would the quantity provided be efficient, inefficiently low, or inefficiently high?

10.A residential community has 100 residents who are concerned about security. The accompanying table gives the total cost of hiring a 24-hour security service as well as each individual resident’s total benefit.

11.The accompanying table shows Tanisha’s and Ari’s individual marginal benefit of different numbers of street cleanings per month. Suppose that the marginal cost of street cleanings is constant at $9 each.

12.Anyone with a radio receiver can listen to public radio, which is funded largely by donations.

13.Your economics teacher assigns a group project for the course. Describe the free-rider problem that can lead to a suboptimal outcome for your group. To combat this problem, the instructor asks you to evaluate the contribution of your peers in a confidential report. Will this evaluation have the desired effects?

14.The accompanying table shows six consumers’ willingness to pay (his or her individual marginal benefit) for one MP3 file copy of a Jay-Z album. The marginal cost of making the file accessible to one additional consumer is constant, at zero.

15.Software has historically been an artificially scarce good—it is nonrival because the cost of replication is negligible once the investment to write the code is made, but software companies make it excludable by charging for user licenses. Recently, however, open-source software has emerged, most of which is free to download and can be modified and maintained by anyone.

16.The two dry-cleaning companies in Collegetown, College Cleaners and Big Green Cleaners, are a major source of air pollution. Together they currently produce 350 units of air pollution, which the town wants to reduce to 200 units. The accompanying table shows the current pollution level produced by each company and each company’s marginal cost of reducing its pollution. The marginal cost is constant.

Suppose instead that Collegetown issues 100 pollution vouchers to each company, each entitling the company to one unit of pollution, and that these vouchers can be traded.

17.Ronald owns a cattle farm at the source of a long river. His cattle’s waste flows into the river and down many miles to where Carla lives. Carla gets her drinking water from the river. By allowing his cattle’s waste to flow into the river, Ronald imposes a negative externality on Carla. In each of the two following cases, do you think that through negotiation, Ronald and Carla can find an efficient solution? What might this solution look like?

18.In the city of Metropolis, there are 100 residents, each of whom lives until age 75. Residents of Metropolis have the following incomes over their lifetime: Through age 14, they earn nothing. From age 15 until age 29, they earn 200 metros (the currency of Metropolis) per year. From age 30 to age 49, they earn 400 metros. From age 50 to age 64, they earn 300 metros. Finally, at age 65 they retire and are paid a pension of 100 metros per year until they die at age 75. Each year, everyone consumes whatever their income is that year (that is, there is no saving and no borrowing). Currently, 20 residents are 10 years old, 20 residents are 20 years old, 20 residents are 40 years old, 20 residents are 60 years old, and 20 residents are 70 years old.

19.The accompanying table presents data from the U.S. Census Bureau on median and mean income of male workers for the years 1972 and 2009. The income figures are adjusted to eliminate the effect of inflation.

20.There are 100 households in the economy of Equalor. Initially, 99 of them have an income of $10,000 each, and one household has an income of $1,010,000.

Through its poverty programs, the government of Equalor now redistributes income: it takes $990,000 away from the richest household and distributes it equally among the remaining 99 households.

21.The tax system in Taxilvania includes a negative income tax. For all incomes below $10,000, individuals pay an income tax of –40% (that is, they receive a payment of 40% of their income). For any income above the $10,000 threshold, the tax rate on that additional income is 10%. For the first three scenarios below, calculate the amount of income tax to be paid and after-tax income.

22.In the city of Notchingham, each worker is paid a wage rate of $10 per hour. Notchingham administers its own unemployment benefit, which is structured as follows: If you are unemployed (that is, if you do not work at all), you get unemployment benefits (a transfer from the government) of $50 per day. As soon as you work for only one hour, the unemployment benefit is completely withdrawn. That is, there is a notch in the benefit system.

23.The accompanying table shows data on the total number of people in the United States and the number of all people who were uninsured, for selected years from 1999 to 2009. It also shows data on the total number of poor children in the United States—those under 18 and below the poverty threshold—and the number of poor children who were uninsured.

For each year, calculate the percentage of all people who were uninsured and the percentage of poor children who were uninsured. How have these percentages changed over time? What is a possible explanation for the change in the percentage of uninsured poor children?

24.The American National Election Studies conducts periodic research on the opinions of U.S. voters. The accompanying table shows the percentage of people, in selected years from 1952 to 2008, who agreed with the statement “There are important differences in what the Republicans and Democrats stand for.”

What do these data say about the degree of partisanship in U.S. politics over time?

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