Problem Set 6
Hard copies of your answers are due at the beginning of your section, either onThursday, November 3, or Friday, November 4. For example, if your sectionstarts at 10:00am on Friday, you should submit your answers to your TA in yoursection classroom at 10:00am on Friday, November 4. Late problems earn zeropoints.
: you can work on these problems or your own, or in a small group withother
Econ 1 students. If you choose to work in a group, each studentneeds to hand in a separate, individual copy to his/her TA.1. According to economists Becker and Grossman, each pack of cigarettessmoked creates about 68 cents of externalities borne by other members ofsociety. The externalities include the costs of cigarette smokers’ excess use ofhealth services, costs of fetal death, secondhand smoke, etc.a. Explain how a tax could be used to correct the externality. Show itgraphically.b. Mention another way that the government may try to use to correct theoverproduction of cigarettes due to the negative externality.2. Suppose that it costs $25,000 per day to build and maintain a bridgepotentially serving 20,000 people. 10,000 of these people are willing to pay $2per day to cross the bridge, while the other 10,000 value the bridge at $1 perday.a. Assuming that there is no congestion, is it efficient to build the bridge?b. Can you find a toll that will raise revenues sufficient to cover the costs ofbuilding and operating the bridge?c. Is the bridge a public good? What does your answer to parts (a) and (b)indicate about a possible role for government intervention?3. A dentist and a writer live next door to each other, and each has her officeat home. Screams of pain from the patients in the dentist’s office interferewith the writer’s creativity, causing her to write inferior novels and lose $800per year in income. The dentist would have to spend $600 to install sound-absorbing material on her office walls, and this material would have to bereplaced each year. The writer sues the dentist. The court can rule in favor ofthe author and require the dentist to soundproof her walls, or it can rule infavor of the dentist and dismiss the case. Explain what would happen undereach ruling if:a. The dentist and the writer are on speaking terms (small transaction costs,ignoring court fees).