1. The marginal external cost associated with air pollution increases with the annual output of a polluting industry. At the current competitive equilibrium level of output per year the marginal external cost is $10 per unit of output. To achieve efficiency,
a) a corrective tax of $10 per unit of output is required.
b) a corrective tax of more than $10 per unit of output is required.
c) a corrective tax of less that $10 per unit of output is required.
d) a corrective subsidy of $10 per unit of output is required.
e) a corrective subsidy of less than $10 per unit of output is required.
2. A positive externality results from the purchase of smoke detectors. If smoke detectors are sold in a competitive market,
a) the marginal social benefit of smoke detectors is less than the marginal private benefit received by any consumer.
b) the marginal social benefit will exceed the marginal private benefit received by any consumer.
c) in equilibrium the marginal social cost of smoke detectors will equal the marginal social benefit.
d) in equilibrium the marginal social benefit os smoke detectors is zero.
3. If a positive externality prevails in the market for smoke detectors, then when the market is in equilibrium,
a) the marginal social benefit of smoke detectors exceeds the marginal social cost.
b) the marginal social cost of smoke detectors exceeds the marginal social benefit.
c) the marginal social cost of smoke detectors is equal to the marginal social benefit.
d) more than the efficient amount of smoke detectors is sold.
4. Currently eight security guards patrol a condominium community each week. The number of guards has been determined by majority rule. Each voter pays a tax share of $50 per guard. If voter "M" is the median voter,
a) his marginal benefit from security guards is $50.
b) his marginal benefit exceeds that of any other voter.
c) the difference between his marginal benefit and $50 is at a maximum.
d) he would be made better off if more security guards were hired per week.
Before you answer the first question, you need to consider what are marginal external costs. Marginal external costs (often associated with negative externalities) are the costs resulting from the production of one additional unit accruing to a different party than the one producing or consuming the product. So take for example, there might be a factory that is producing one extra unit of a product which causes further pollution and becomes a ...
This solution include responses to four multilple choice questions that relate to marginal external costs and positve externality.
External Costs with Fixed-Production Technology
(See attached file for full problem description with diagram)
8. (External Costs with Fixed-Production Technology) Review the situation illustrated in Exhibit 1 in this chapter. If the government sets the price of electricity at the socially optimal level, why is the net gain equal to triangle abc, even though consumers now pay a higher price for electricity? What would the net gain be if the government set the price above the optimal level?