PROBLEMS

  1. Question 16.12

    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?

    1. Mr. Chau plants lots of colorful flowers in his front yard.

    2. Your next-door neighbor likes to build bonfires in his backyard, and sparks often drift onto your house.

    3. Maija, who lives next to an apple orchard, decides to keep bees to produce honey.

    4. Justine buys a large SUV that consumes a lot of gasoline.

  2. Question 16.13

    Many dairy farmers in California are adopting a new technology that allows them to produce their own electricity from methane gas captured from animal waste. (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.

    1. Explain how the ability to earn money from capturing and transforming methane gas behaves like a Pigouvian tax on methane gas pollution and can lead dairy farmers to emit the efficient amount of methane gas pollution.

    2. Suppose some dairy farmers have lower costs of transforming methane into electricity than others. Explain how this system of capturing and selling methane gas leads to an efficient allocation of emissions reduction among farmers.

  3. Question 16.14

    Voluntary environmental programs were extremely popular in the United States, Europe, and Japan in the 1990s. Part of their popularity stems from the fact that these programs do not require legislative authority, which is often hard to obtain. The 33/50 program started by the Environmental Protection Agency (EPA) is an example of such a program. With this program, the EPA attempted to reduce industrial emissions of 17 toxic chemicals by providing information on relatively inexpensive methods of pollution control. Companies were asked to voluntarily commit to reducing emissions from their 1988 levels by 33% by 1992 and by 50% by 1995. The program actually met its second target by 1994.

    1. As in Figure 16-3, draw marginal benefit curves for pollution generated by two plants, A and B, in 1988. Assume that without government intervention, each plant emits the same amount of pollution, but that at all levels of pollution less than this amount, plant A’s marginal benefit of polluting is less than that of plant B. Label the vertical axis “Marginal benefit to individual polluter” and the horizontal axis “Quantity of pollution emissions.” Mark the quantity of pollution each plant produces without government action.

    2. Do you expect the total quantity of pollution before the program was put in place to have been less than or more than the optimal quantity of pollution? Why?

    3. Suppose the plants whose marginal benefit curves you depicted in part a were participants in the 33/50 program. In a replica of your graph from part a, mark targeted levels of pollution in 1995 for the two plants. Which plant was required to reduce emissions more? Was this solution necessarily efficient?

    4. What kind of environmental policy does the 33/50 program most closely resemble? What is the main shortcoming of such a policy? Compare it to two other types of environmental policies discussed in this chapter.

  4. Question 16.15

    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. Question 16.16

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

    1. Using concepts in the chapter, explain why a municipality would subsidize planting trees on private property, but near the street.

    2. Draw a diagram similar to Figure 16-4 that shows the marginal social benefit, the marginal social cost, and the optimal Pigouvian subsidy on planting trees.

  6. Question 16.17

    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 uncontrolled fishing generates a negative externality and how the voucher scheme may overcome the inefficiency created by this externality.

  7. Question 16.18

    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.

    Companies

    Initial pollution level (units)

    Marginal cost of reducing pollution (per unit)

    College Cleaners

    230

    $5

    Big Green Cleaners

    120

    $2

    1. Suppose that Collegetown passes an environmental standards law that limits each company to 100 units of pollution. What would be the total cost to the two companies of each reducing its pollution emissions to 100 units?

      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.

    2. How much is each pollution voucher worth to College Cleaners? To Big Green Cleaners? (That is, how much would each company, at most, be willing to pay for one more voucher?)

    3. Who will sell vouchers and who will buy them? How many vouchers will be traded?

    4. What is the total cost to the two companies of the pollution controls under this voucher system?

  8. Question 16.19

    1. EAuction and EMarketplace are two competing internet auction sites, where buyers and sellers transact goods. Each auction site earns money by charging sellers for listing their goods. EAuction has decided to eliminate fees for the first transaction for sellers that are new to its site. Explain why this is likely to be a good strategy for EAuction in its competition with EMarketplace.

    2. EMarketplace complained to the Justice Department that EAuction’s practice of eliminating fees for new sellers was anti-competitive and would lead to monopolization of the internet auction industry. Is EMarketplace correct? How should the Justice Department respond?

    3. EAuction stopped its practice of eliminating fees for new sellers. But since it provided much better technical service than its rival, EMarketplace, buyers and sellers came to prefer EAuction. Eventually, EMarketplace closed down, leaving EAuction as a monopolist. Should the Justice Department intervene to break EAuction into two companies? Explain.

    4. EAuction is now a monopolist in the internet auction industry. It also owns a site that handles payments over the internet, called PayForlt. It is competing with another internet payment site, called PayBuddy. EAuction has now stipulated that any transaction on its auction site must use PayForIt, rather than PayBuddy, for the payment. Should the Justice Department intervene? Explain.

  9. Question 16.20

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

    1. The choice between installing 110-volt electrical current in structures rather than 220-volt

    2. The choice between purchasing a Toyota versus a Ford

    3. The choice of a printer, where each printer requires its own specific type of ink cartridge

    4. The choice of whether to purchase an iPod Touch or an iPod Nano.

WORK IT OUT

For interactive, step-by-step help solving the following problem, check out this Work It Out tutorial under student resources.

Question 16.21

10. 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.

  1. Draw the marginal social benefit curve and the marginal social cost curve. Use your diagram to determine the socially optimal volume of music.

  2. Only the members of the sorority benefit from the music, and they bear none of the cost. Which volume of music will they choose?

  3. The college imposes a Pigouvian tax of $3 per decibel of music played. From your diagram, determine the volume of music the sorority will now choose.