Microeconomics 6th Edition Hubbard Solutions Manual 1

Solution Manual for Microeconomics 6th Edition
Hubbard OBrien 0134106245 9780134106243

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CHAPTER 5 | Externalities, Environmental

Policy, and Public Goods
Brief Chapter Summary and Learning Objectives
5.1 Externalities and Economic Efficiency (pages 148–151)
Identify examples of positive and negative externalities and use graphs to show how
externalities affect economic efficiency.
▪ A negative externality is a cost that affects someone not directly involved in the production
or consumption of a good or service.
▪ A positive externality is a benefit that affects someone not directly involved in the
production or consumption of a good or service.
5.2 Private Solutions to Externalities: The Coase Theorem (pages 151–158)

Discuss the Coase theorem and explain how private bargaining can lead to economic
efficiency in a market with an externality.
▪ If transactions costs are low, private bargaining can result in efficient solutions to
externality problems.
5.3 Government Policies to Deal with Externalities (pages 158–165)

Analyze government policies to achieve economic efficiency in a market with an externality.
▪ When private solutions to externalities are not feasible, government intervention in the
form of a tax (negative externality) or subsidy (positive externality) can bring about an
efficient level of output.
Copyright © 2017 Pearson Education, Inc.

CHAPTER 5 | Externalities, Environmental Policy, and Public Goods 105
5.4 Four Categories of Goods (pages 165–173)

Explain how goods can be categorized on the basis of whether they are rival or excludable
and use graphs to illustrate the efficient quantities of public goods and common resources.
▪ The four categories of goods are private, public, quasi-public, and common resources.
Key Terms
Coase theorem, p. 156. The argument of Private benefit, p. 149. The benefit received by
economist Ronald Coase that if transactions the consumer of a good or service.
costs are low, private bargaining will result in an
efficient solution to the problem of externalities. Private cost, p. 149. The cost borne by the
producer of a good or service.
Command-and-control approach, p. 163. A
policy that involves the government imposing Private good, p. 166. A good that is both rival
quantitative limits on the amount of pollution and excludable.
firms are allowed to emit or requiring firms to Property rights, p. 151. The rights individuals
install specific pollution control devices. or businesses have to the exclusive use of their
property, including the right to buy or sell it.
Common resource, p. 166. A good that is rival
but not excludable. Public good, p. 166. A good that is both
nonrival and nonexcludable.
Excludability, p. 165. The situation in which
anyone who does not pay for a good cannot Rivalry, p. 165. The situation that occurs when
consume it. one person’s consumption of a unit of a good
means no one else can consume it.
Externality, p. 148. A benefit or cost that affects
someone who is not directly involved in the Social benefit, p. 149. The total benefit from
production or consumption of a good or service. consuming a good or service, including both
the private benefit and any external benefit.
Free riding, p. 166. Benefiting from a good
without paying for it. Social cost, p. 149. The total cost of producing a
good or service, including both the private cost
Market failure, p. 151. A situation in which the and any external cost.
market fails to produce the efficient level of
output. Tragedy of the commons, p. 171. The tendency
for a common resource to be overused.
Pigovian taxes and subsidies, p. 163.
Government taxes and subsidies intended to Transactions costs, p. 156. The costs in time
bring about an efficient level of output in the and other resources that parties incur in the
presence of externalities. process of agreeing to and carrying out an
exchange of goods or services.

104 CHAPTER 5 | Externalities, Environmental Policy, and Public Goods
Chapter Outline
Can Economic Policy Help Protect the Environment?
Most scientists believe burning fossil fuels generates greenhouse gases that can increase global warming.
Public opinion polls show that a majority of people believe the government should regulate greenhouse
gases. Most economists agree, but disagree with the public about which government policies would be best.
Many economists endorse market-based policies that rely on incentives rather than administrative rules. A
carbon tax is an example of a market-based policy. Some businesses oppose the carbon tax because they
believe it would raise their costs of production. Other businesses believe a carbon tax would be less costly
and more effective than other government policies.
Externalities and Economic Efficiency (pages 148–151)

5.1 Learning Objective: Identify examples of positive and negative externalities and use
graphs to show how externalities affect economic efficiency.
An externality is a benefit or cost that affects someone who is not directly involved in the production or
consumption of a good or service. In the case of air pollution, there is a negative externality because people
with asthma, for example, may bear a cost even though they were not involved in the buying or selling of
the electricity that caused the pollution. Medical research is an example of a positive externality because
people who are not directly involved in producing it or paying for it can benefit.
A. The Effect of Externalities

A competitive market achieves economic efficiency by maximizing the sum of consumer and producer
surpluses. But that result holds only if there are no externalities in production or consumption. An
externality causes a difference between the private cost of production and the social cost, or the private
benefit from consumption and the social benefit. The private cost is the cost borne by the producer of a
good or service. The social cost is the total cost of producing a good or service, including both the private
cost and any external cost. The private benefit is the benefit received by the consumer of a good or service.
The social benefit is the total benefit from consuming a good or service, including both the private benefit
and any external benefit. When there is a negative externality in the production of a good or service, too
much of the good or service will be produced at market equilibrium. When there is a positive externality in
consuming a good or service, too little of the good or service will be produced at market equilibrium.
B. Externalities and Market Failure

Market failure is a situation in which the market fails to produce the efficient level of output.
C. What Causes Externalities?

Governments need to guarantee property rights for a market system to function well. Property rights are
the rights individuals or businesses have to the exclusive use of their property, including the right to buy or
sell it. In certain situations, property rights do not exist or cannot be legally enforced. Externalities and
market failures result from incomplete property rights or from the difficulty of enforcing property rights in
certain situations.
Teaching Tips
Industrial pollution is often cited as an example of a negative externality, but you can also use smoking as
a classroom example. Most college students grew up in an era where smoking was much less socially
acceptable than when their parents and grandparents were young. Students are often stunned to learn that
smoking—by both students and instructors—was allowed in many college classrooms as late as the 1970s.

Although few, if any, colleges allow smoking in classroom buildings now, many bars and restaurants have
smoking sections. Ask your students (a) if they would be willing to pay smokers to not smoke while they
are in the same restaurant, or (b) if they have ever chosen to sit in a restaurant’s smoking section to avoid a
longer wait for a table in a non-smoking section.
Extra Solved Problem 5.1

Smoking at Ike’s Bar-B-Q Pit
By 2015, only 16 U.S. states permitted patrons to smoke in both their bars and restaurants. Ike’s Bar-B-Q
Pit is located in one of these states. Some of Ike’s non-smoking customers, including some who suffer from
asthma, have asked Ike to adopt a no-smoking rule for his restaurant. Upon hearing of this request, some of
Ike’s other customers complained that they have smoked in Ike’s restaurant for years and would not
patronize the restaurant if the no-smoking rule were adopted. Ike is greatly concerned because he does not
wish to lose business from either his smoking or non-smoking customers.
Draw a graph illustrating the externality associated with smoking in Ike’s Bar-B-Q Pit and explain how this
externality causes a deviation from economic efficiency in this market.
Solving the Problem
Step 1: Review the chapter material.
This problem is about externalities, so you may want to review the section “Externalities and
Economic Efficiency,” which begins on page 148 of the textbook.
Step 2: Draw a graph to illustrate the externality at Ike’s Bar-B-Q Pit.

This is a negative externality because there are external costs imposed on Ike’s non-smoking
customers as a result of breathing second-hand smoke. These are costs that neither Ike nor his
smoking customers have to pay.
Step 3: Describe how the externality causes a deviation from economic efficiency.
The economically efficient outcome is for the quantity of meals served at Ike’s restaurant to be
Q2 and the price of the meals to be P2. (Ike’s, no doubt, has a varied menu with different meals
with different prices. To simplify this problem, assume P2 is an average meal price.) This

outcome would be economically efficient because it is where the market supply curve that
represents social costs, including the negative health effects on non-smokers, crosses the
demand curve. At this point, the marginal benefit from Ike’s meals would equal the marginal
social cost. However, because neither Ike nor his smoking patrons have to pay for the negative
externality, the market supply curve represents only private costs. As a result, the equilibrium
market price and quantity are P1 and Q1. At this point, the marginal social cost from Ike’s meals
exceeds the marginal benefit.
Extra Making
the The Fable of the Bees
Connection
Apple trees must be pollinated by bees to bear fruit. Bees need the nectar from apple trees (or other plants)
to produce honey. James Meade, winner of the 1977 Nobel Prize in Economics, argued that there were
positive externalities in both apple growing and beekeeping. The more apple trees growers planted, the
more honey would be produced. And the more hives beekeepers kept, the larger the apple crops in
neighboring apple orchards. Steven Cheung of the University of Washington showed that government
intervention was not needed to increase economic efficiency in the markets for apples and honey because
beekeepers and apple growers had long since arrived at private agreements. In other words, a “Coase
solution” to the problem of positive externalities had been reached.
Today, honeybees pollinate more than $14 billion worth of crops annually nationwide. About 1.6 million
beehives are required to pollinate the California almond crop. Beehives are shipped into the state in
February and March to pollinate the almond trees, and then they are shipped to Oregon and Washington to
pollinate cherry, pear, and apple orchards during April and May. But North American beekeepers have
suffered the loss of over 10 million beehives since 2007 from what scientists refer to “colony collapse
disorder.” Researchers from the Harvard School of Public Health recently have found evidence that colony
collapse disorder may be due to exposure to a class of widely used insecticides. Harvard researcher
Chensheng Lu believes that future research “…could help elucidate the biological mechanism responsible
[for the disorder]… Hopefully we can reverse the continuing trend of honey bee loss.” While some scientists
have called for restricting or banning the use of the insecticides responsible for the problem other scientists
are attempting to develop almond trees that require fewer bees to pollinate and a private company is
attempting to commercialize a “blue orchard bee” that is stingless and works at colder temperatures than
the honeybee.
Sources: James E. Meade, “External Economies and Diseconomies in a Competitive Situation,” Economic Journal, Vol. 62, March
1952, pp. 54–67; Steven N. S. Cheung, “The Fable of the Bees: An Economic Investigation,” Journal of Law and Economics, Vol. 16,
No. 1, April 1973, pp. 11–33; Eric Mack, “The Cause of Colony Collapse Disorder, Disappearing Bees Becoming More Clear,” Forbes,
May 12, 2014. Wendy Lyons Sunshine, “Is Life Too Hard for Honeybees?” Scientific American, March 31, 2009; and Jeff Nesbit,
“Bee Colony Collapses Are More Complex Than We Thought,” US News & World Report, August 7, 2013.
Question
We know that owners of apple orchards and beehives are able to negotiate private agreements. Is it likely
that as a result of these private agreements, the market supplies the efficient quantities of apple trees and
beehives? Are there any real-world difficulties that might stand in the way of achieving this efficient
outcome?
Answer
It seems likely that private agreements will result in something close to the efficient quantities of apple
trees and beehives. We know that private agreements are detailed and enforceable, so it is likely that the

externalities can be internalized successfully. However, the transactions costs involved in negotiating the
agreements may result in the efficient quantities of apple trees and beehives not being attained exactly.
Private Solutions to Externalities: The Coase Theorem (pages 151–158)

5.2 Learning Objective: Discuss the Coase theorem and explain how private bargaining can
lead to economic efficiency in a market with an externality.
Although government intervention may increase economic efficiency in markets where externalities are
present, it is possible for people to find private solutions to the problem of externalities. Ronald Coase made
this argument in a 1960 article. To understand Coase’s argument, it is important to understand that
completely eliminating an externality is usually not economically efficient.
A. The Economically Efficient Level of Pollution Reduction

The optimal decision is to continue any activity up to the point where the marginal benefit equals the
marginal cost. This applies to reducing pollution just as much as other activities. As pollution declines,
society benefits, but the marginal benefit from eliminating another unit of pollution declines as emissions
are reduced. As pollution declines, the marginal cost of further reductions rises. The net benefit to society
from reducing pollution is equal to the difference between the benefit of reducing pollution and the cost.
To maximize the net benefit to society, any type of pollution should be reduced to the point where the
marginal benefit from another ton of reduction is equal to the marginal cost.
B. The Basis for Private Solutions to Externalities

In arguing that private solutions to the problem of externalities were possible, Ronald Coase emphasized
that when more than the optimal level of pollution is occurring, the benefits from reducing the pollution to
the optimal level are greater than the costs.
C. Do Property Rights Matter?

Ronald Coase pointed out that the amount of pollution reduction will be the same whether polluters or the
victims of pollution are legally liable for damages. Bargaining between the parties will result in the same
reduction in pollution, where the marginal benefit of the last unit of reduction is equal to the marginal cost.
D. The Problem of Transactions Costs

There are frequently practical difficulties in the way of a private solution to the problem of externalities.
For example, if many people suffer from the negative effects of pollution, bringing all the victims together
with all the producers of the pollution to negotiate an agreement often fails due to high transactions costs.
Transactions costs are the costs in time and other resources that parties incur in the process of agreeing to
and carrying out an exchange of goods or services.
E. The Coase Theorem

The Coase Theorem is the argument of economist Ronald Coase that if transactions costs are low, private
bargaining will result in an efficient solution to the problem of externalities. Private bargaining is most
likely to reach an efficient outcome when the number of bargaining parties is small and all parties are
willing to accept a reasonable agreement.


Ike’s Bar-B-Q Pit Reaches a Coase Solution
Refer to Extra Solved Problem 5.1 in this Instructor’s Manual. Because Ike’s restaurant is not in a state that
regulates smoking in public places, Ike decides to meet with his smoking and non-smoking customers to
accommodate both of their wishes regarding his smoking policy. Suggest a solution that would be consistent
with the Coase Theorem.
Solving the Problem

This problem is about the Coase theorem, so you may want to review the section “Private
Solutions to Externalities: The Coase Theorem,” which begins on page 151.
Step 2: Describe the type of solution that would bring about an efficient outcome and be
consistent with the Coase Theorem.
Private bargaining between those who are the source of the externality and those who are
affected by the externality could result in a solution that is satisfactory to both parties.
Step 3: Suggest a solution that would enhance the well-being of Ike’s customers and
increase economic efficiency.
One possible solution is to construct a wall separating Ike’s restaurant into smoking and non-
smoking sections. This would raise the cost of providing meals at Ike’s and, in effect, shift to
the left the supply curve that represents private costs from the graph in Extra Solved Problem
5.1. The cost of the wall could be passed on to either or both groups of customers. It would not
matter if the cost was paid for by the smokers or non-smokers, as long as the economically
efficient rate of output was achieved where the marginal social cost equals the marginal benefit
from the meals served at Ike’s.

Government Policies to Deal with Externalities (pages 158–165)

5.3 Learning Objective: Analyze government policies to achieve economic efficiency in a
market with an externality.
British economist A.C. Pigou was the first to analyze market failure systematically.
A. Imposing a Tax When There Is a Negative Externality

Pigou argued that to deal with a negative externality in production, the government should impose a tax
equal to the cost of the externality, which would cause a produce to internalize the externality.
B. Providing a Subsidy When There Is a Positive Externality

Pigou reasoned that the government can deal with a positive externality in consumption by giving
consumers a subsidy equal to the value of the externality. Payment of the subsidy will allow consumers to
internalize the externality. Pigovian taxes and subsidies are government taxes and subsidies intended to
bring about an efficient level of output in the presence of externalities. A Pigovian tax eliminates
deadweight loss and improves economic efficiency.
C. Command-and-Control versus Market-Based Approaches

A command-and-control approach to pollution is a policy that involves the government imposing
quantitative limits on the amount of pollution firms are allowed to emit or requiring firms to install specific
pollution control devices. Instead of a command-and-control approach, Congress decided to use a cap-and-
trade system of tradeable emission allowances to deal with the problem of acid rain. The objective was to
reduce emissions of sulfur dioxide to 8.5 million tons annually by 2010. The federal government gave
electric utilities, the major sources of sulfur dioxide emissions that cause acid rain, allowances equal to the
total amount of allowable emissions. The utilities were then free to buy and sell the allowances. Utilities
that could reduce their emissions at a low cost did so and sold some or all of their allowances to utilities
that could reduce their emissions only at a high cost. The program was successful not only in reducing
emissions but in doing so at a much lower cost than had been expected.
D. The End of the Sulfur Dioxide Cap-and-Trade System

Despite its success, the sulfur dioxide cap-and-trade system effectively ended in 2013. Research showed
that illnesses caused by sulfur dioxide emissions were greater than previously had been thought. Although
President George W. Bush proposed legislation to lower the cap on sulfur dioxide emissions, Congress did
not pass the legislation. As a result, the Environmental Protection Agency (EPA) reverted to setting limits
on sulfur dioxide emissions at the state or power plant level.
E. Are Tradable Emissions Allowances Licenses to Pollute?

Some environmentalists have labeled tradable emissions allowances “licenses to pollute.” But this criticism
ignores a central economics lesson: resources are scarce and trade-offs exist. Resources spent reducing
pollution are not available for any other use. Because reducing acid rain using allowances cost utilities $870
million, rather than $7.4 billion as originally estimated, society saved more than $6.5 billion per year.

Using a Tax to Deal with a Negative Externality
Companies that produce toilet paper bleach the paper to make it white. Some paper plants discharge the
bleach into rivers and lakes, causing substantial environmental damage. Suppose the following graph
illustrates the situation in the toilet paper market. Explain how the federal government can use a tax on
toilet paper to bring about the efficient level of production. What should the value of the tax be?

Solving the Problem

This problem is about the government using a tax to deal with a negative externality in
production, so you may want to review the section “Government Policies to Deal with
Externalities,” which begins on page 158.
Step 2: Use the information from the graph to determine the necessary tax.
The efficient level of toilet paper production will occur where the marginal social benefit from
consuming toilet paper, as represented by the demand curve, is equal to the marginal social cost
of production. The graph shows that this will occur at a price of $150 per ton and production of
350,000 tons. In the absence of government intervention, the price will be $125 per ton, and
production will be 450,000 tons. It is tempting—but incorrect!—to think that the government
could bring about the efficient level of production by imposing a per-ton tax equal to the difference
between the price when production is at its optimal level and the current market price. But this
would be a tax of only $25. The graph shows that at the optimal level of production, the difference
between the marginal private cost and the marginal social cost is $50. Therefore, a tax of $50 per
ton is required to shift the supply curve up from S1 to S2.
Teaching Tips
Economists working for the private research group, Resources for the Future (RFF), are among the strongest
supporters of market-based systems, such as cap-and-trade systems, to reduce pollution.
In formulating environmental policy, it is often difficult to put a dollar value on environmental damage. For
example, what is the dollar value of the breathing difficulty that people with asthma experience due to sulfur
dioxide pollution? Economists at RFF have pioneered techniques for measuring the value of things for
which no market price exists. You can refer students interested in environmental economic issues to the
RFF Web site: www.rff.org. RFF, located in Washington D.C., has internship programs that provide
opportunities for undergraduates to do research with environmental economists.

Four Categories of Goods (pages 165–173)

Learning Objective: Explain how goods can be categorized on the basis of whether
5.4 they are rival or excludable and use graphs to illustrate the efficient quantities of
public goods and common resources.
Goods differ on the basis of whether their consumption is rival and excludable. Rivalry is the situation that
occurs when one person’s consumption of a unit of a good means no one else can consume it. Excludability
is the situation in which anyone who does not pay for a good cannot consume it. There are four categories
of goods. A private good is a good that is both rival and excludable. A public good is a good that is both
nonrival and nonexcludable. Free riding is benefiting from a good without paying for it. A quasi-public
good is excludable but not rival. A common resource is a good that is rival but not excludable.
A. The Demand for a Public Good

We can determine the market demand curve for a private good or service by adding horizontally the quantity
of the good demanded at each price by each consumer. To arrive at a demand curve or marginal social
benefit curve for a public good, we don’t add quantities at each price; instead, we add the price each
consumer is willing to pay for each quantity of the public good. This value represents the total dollar amount
consumers as a group would be willing to pay for that quantity of the public good.
B. The Optimal Quantity of a Public Good

The optimal quantity of any public good will occur where the marginal social benefit curve intersects the
supply curve. One difficulty with the market providing the economically efficient quantity of a public good
is that the individual preferences of consumers are not revealed in this market. Because no consumer can
be excluded from consuming the services provided by the good, no one has an incentive to reveal his or her
preferences. Governments sometimes use cost-benefit analysis to determine the quantity of a public good
that should be supplied. However, for many public goods, including national defense, the quantity supplied
is determined by a political process involving Congress and the president.
C. Common Resources
In England during the Middle Ages, each village had an area of pasture, known as a commons, on which
any family in the village was allowed to graze its cows or sheep without charge. Because the grass that one
cow ate was not available to another cow, consumption was rival. But every family in the village had the
right to use the commons, so it was nonexcludable and the commons would end up being overgrazed. The
tendency for a common resource to be overused is called the tragedy of the commons. The source
of the tragedy of the commons is the same as the source of negative externalities: a lack of clearly defined
and enforced property rights. Enforcing property rights is not always feasible. For example, because no
country owns the oceans beyond its own coastal waters, the fish and other resources of the ocean remain a
common resource. Two types of solutions are possible. If the geographic area involved is limited and the
number of people involved is small, access to the commons can be restricted through community norms
and laws. If the geographic area or the number of people is large, legal restrictions on access to the commons
are required.
Teaching Tips
According to the U.S. Department of Agriculture, the average American consumes 223 pounds of beef,
pork, and chicken annually. Despite the large and continuing demand for this meat, we do not see news
reports of shortages of cows, pigs, and chickens. In contrast, there are occasional media reports of over-
fishing and the possible extinction of some animal species. When resources are privately owned, owners
have incentives to conserve their use; producers have strong incentives to maintain the stocks of cows, pigs,
and chickens to ensure future supplies. Property rights to some parts of oceans, rivers, lakes, and habitat
areas of endangered species are nonexistent or are poorly enforced.

Extra Making
the Paying for Speed
Connection
Economists have used public highways as examples of a common resource. Highways are nonexcludable
because all automobile drivers have access to them, and rival because as more drivers enter a highway, the
amount of congestion increases. For busy interstate highways near large cities, congestion can become severe.
For example, during rush hour Minneapolis commuters can spend over an hour on Interstate 394 for a drive
that can take as little as twelve minutes without traffic. In 2005, Minnesota began using a market-based
approach to its common resource problem: Commuters on I-394 were allowed to pay tolls to use carpool lanes.
Technology has allowed the toll to vary based on the amount of congestion, from 25 cents to $8. The goal is to
regulate traffic so that those willing to pay the toll can maintain a speed close to 55 miles per hour. Although
charging drivers to avoid traffic is not a new idea, it has become increasingly popular among municipalities.
Additional revenue is raised, but only from those drivers who are willing to pay to save time. “The congestion
problem is bad and getting worse, and we aren’t in the position where we can dismiss possible solutions that
involve changing the way we pay for travel,” notes Tim Lomax, a research engineer from Texas A&M
University. Sensors in highway pavement keep track of the number of cars and their speed. When traffic slows,
computers increase the toll, which discourages drivers from entering the toll lanes. Toll amounts are displayed
on signs visible to drivers and are deducted from an electronic card placed inside a driver’s vehicle. Some
critics of this program are concerned that the toll lanes cater to the needs of wealthy drivers, but the toll lanes
appeal to other drivers as well. The program has another benefit: Drivers who use the lanes report using less
gasoline than when they spend more time fighting traffic.
Source: Daniel Machalaba, “Paying for VIP Treatment in a Traffic Jam,” Wall Street Journal, June 21, 2007.
Extra Economics in Your Life:

How Can the Adverse Impact of a Carbon Tax be Minimized?
Economists Marc Hafstead and Lawrence Goulder argue that a tax on carbon dioxide emissions would be
an economically efficient means to reduce emissions that would have the added benefit of generating
billions of dollars annually for the U.S. government. But critics argue that a so-called “carbon tax” would
fall disproportionately on lower income households who spend a relatively large fraction of their income
on energy. To reduce the adverse impact of higher taxes, tax advocates recommend rebating some of the
revenue raised. But what type of tax rebate would be the most economically efficient? Hafstead and Goulder
compared the potential effects of: (a) cuts in taxes for businesses adversely affected by the carbon tax, (b)
a lump-sum rebate to all households, (c) marginal tax rate reductions. Marginal tax rates refer to the fraction
of each additional dollar of income that must be paid in taxes.
Source: Marc Hafstead and Lawrence H. Goulder, “Recycling Revenue from a Carbon Tax,” Common Resources, Resources for
the Future, November 6, 2013.
Question: Which tax rebate would be the most economically efficient means to reduce the adverse impact
of a carbon tax?
Answer: Research by Hafstead and Goulder found that using revenue from a carbon tax to finance marginal
tax rate cuts would significantly lower the cost of a carbon tax compared to lump-sum rebates. The impact
of the tax would be even lower (the reduction in cost would be greater) if tax revenue would be used to

reduce tax rates of carbon-intensive industries such as coal mining, coal-fired electricity generation, and
petroleum refining.

Solutions to End-of-Chapter Exercises
Externalities and Economic Efficiency

5.1 Learning Objective: Identify examples of positive and negative externalities and use
graphs to show how externalities affect economic efficiency.
Review Questions
1.1 An externality is a benefit or cost that affects someone who is not directly involved in the
production or consumption of a good or service. Examples of positive externalities include (1) the
benefits received by a passerby who enjoys a beautiful garden, and (2) the benefit you receive of a
reduced likelihood of catching influenza resulting from other people being vaccinated. Examples
of negative externalities include (1) the noise from a loud party or from a jetliner, and (2) the
pollution emitted by a factory.
1.2 The private cost of producing a good will differ from the social cost when there is an externality.
For example, the private cost of producing electricity includes the costs of the fuel and the operation
of a power plant, but the social cost includes the private costs plus the costs of the pollution emitted
(a negative externality)—which can reduce visibility and cause health problems. The private benefit
of consuming a good differs from the social benefit when there is an externality. For example, the
private benefit from your college education includes your enjoyment of the experience and the
increase in income you’ll receive as a college graduate, but the social benefits include the benefits
to third parties (a positive externality), such as your potential coworkers’ improved productivity
because you know more, or the gains to people who receive more services from the government
because you earn more and pay more taxes.
1.3 Economic efficiency occurs when the marginal benefit to consumers of the last unit produced is
equal to its marginal cost of production and where the sum of consumer surplus and producer
surplus is maximized. Externalities generally reduce economic efficiency because buyers and firms
ignore the external cost or benefit, which leads firms to either overproduce the good if there is an
external cost, or underproduce the good if there is an external benefit.
1.4 Market failure is the failure of the market to produce the efficient level of output. Externalities,
public goods, and common resources all cause market failure (as does monopoly, which will be
covered in a later chapter).
1.5 Externalities generally arise because of incomplete property rights or from the difficulty in
enforcing property rights.

Problems and Applications

1.6 The neighbor’s barking dog serves as a positive externality when it makes you aware of or prevents
a dangerous situation like a burglar going into your house. The barking dog serves as a negative
externality when it barks constantly and disturbs you.
1.7 Obtaining human food often leads the bear to seek more human food, which causes the bear to be
destroyed or removed from the park. For campers and hikers, the bear seeking human food could
lead to the bear mauling or killing a camper or hiker.
1.8 a. A positive externality arises from getting the flu shot because people in addition to the person
getting the shot receive benefits.
b. Because a positive externality arises from getting a flu shot, the efficient quantity (QEfficient) and
price (PEfficient) are found by locating where the demand curve representing marginal social
benefit (D2) and the market supply curve intersect. The gray shaded area represents the
deadweight loss.
1.9 Driving cars increases traffic congestion and air pollution. Bikers and bike lanes could decrease
both congestion and air pollution. Whether a city should install more bike lanes depends partly on
how many additional people would bike rather than drive. The more people who switch from
driving to biking, the more likely it is that the reduction in negative externalities from driving more
than offset the inconvenience the remaining drivers experience from losing traffic lanes and parking
places.

1.10 The efficient amount of alcohol consumption is Q2, but because the negative externality is ignored,
actual consumption is Q1. The deadweight loss is area A.
1.11 a. A positive externality arises from studying.

b. Tom’s demand for studying is D2, the marginal social benefit curve, which adds together his
marginal private benefit and the marginal external benefit to his future children. He studies QT
hours, which is the efficient amount. Jacob’s demand for studying is D1, the marginal private
benefit curve. Jacob studies only QJ, which is inefficient because at QJ hours the marginal social
benefit from studying exceeds the marginal cost.

1.12 a. In the following graph, as a result of fracking, the supply of natural gas shifts to the right from S1
to S2, which lowers the equilibrium price of natural gas to P2 and raises the equilibrium quantity
of natural gas to Q2.
b. For convenience, assume that S2 represents the marginal private cost of natural gas, while S1
represents the marginal social cost, including the negative externality from fracking. P1 is now
the efficient price, while is P2 is the market price. Q1 is the efficient quantity, while Q2 is the
market quantity.
c. Based on the graph in part b. above, the efficient price and quantity of natural gas are the same
as the equilibrium price and quantity before fracking. However, it is hard to determine how the
efficient price and quantity change because they depend on how much supply increases due to
fracking and how large the external costs associated with the pollution from fracking are.

1.13 By market failures, he means that an unregulated market will result in more than the
economically efficient amount of farmland being developed for other uses, such as shopping
malls or residential housing. Inefficient land allocation refers to the conversion of farmland into
developed land. Because the market fails to take into account the external cost of lost farmland,
an inefficiently large quantity of land (Q1) is developed. The efficient level of land development
is Q2, which is determined by the intersection of Demand and S2.
Private Solutions to Externalities: The Coase Theorem

5.2 Learning Objective: Discuss the Coase theorem and explain how private bargaining can
lead to economic efficiency in a market with an externality.
Review Questions
2.1 The economically efficient level of pollution is the quantity at which the marginal cost of
eliminating another unit of pollution just equals the marginal benefit from eliminating it. The
economically efficient quantity of pollution isn’t zero in most cases. Eliminating all pollution
would incur costs that are greater than the benefits.
2.2 The Coase theorem argues that if transactions costs are low, private bargaining will result in an
efficient solution to the problem of externalities. The parties involved have an incentive to reach
an efficient solution because the benefits from reducing an externality are often greater than the
costs.
2.3 Transactions costs are the costs in time and other resources that parties incur in the process of
agreeing to and carrying out an exchange of goods or services. Private solutions to the problem of
externalities are most likely when it is easy to define and enforce property rights and when the costs
of making a deal are low.


2.4 An increase in pollution could make society better off if the current level of pollution is below the
efficient quantity. For example, government regulations could be so strict that they require pollution
reductions to level A in the figure below. The marginal cost of the last unit of pollution reduction
exceed the marginal benefit, so society would be better off if pollution reduction was only level
B—the efficient quantity.
2.5 Yes, assuming that the marginal benefit does not drop to zero before all of that type of pollution is
eliminated.
2.6 The marginal cost of reducing crime would include resources devoted to police, courts, and prisons.
The marginal benefit from reducing crime would include the reduction in losses to crime victims,
including losses due to personal injury, stolen goods, and anxiety. It’s likely that as the marginal
cost of reducing crime increases, the more crime reduction that occurs. For example, making sure
that no one litters might require the police department to add more officers to patrol neighborhoods
to look for litterers or to install cameras on every street and highway. The marginal benefit from
reducing crime is also likely to decline as more crime reduction occurs. The marginal benefit from
reducing murders and armed robberies is very high, but the marginal benefit from reducing littering
is much lower. So, just as with pollution, it would not be economically efficient to reduce the
amount of crime to zero. In other words, there is an economically efficient level of crime where the
marginal benefit from crime reduction equals the marginal cost.
2.7 As the level of pollution falls, further cleanup becomes increasingly costly because the marginal
cost curve typically is upward sloping. For example, developing countries that have significant air
pollution can use existing technology. Proven pollution reduction methods can be implemented at
the beginning of the cleanup process, so air pollution resulting from automobile or factory
emissions can be reduced. Because significant technological advances have already been made in
these areas, the cost of implementation would be relatively low. Cleaning up the last 10 percent
would be considerably more expensive because a low-cost method to completely eliminate air
pollution in populated, urban areas has yet to be developed. An important trade-off involves
spending resources to develop a method to completely eliminate air pollution versus using those
resources for other purposes, such as education.

2.8 a. As the level of pollution falls, additional reductions in pollution become more costly. To reduce
pollution further will likely require new technology and innovation, which can be expensive.
By “ever diminishing returns in terms of public health” the article means that as air pollution
first began to decline following passage of the Clean Air Act in 1970, there were substantial
improvements in public health as people with breathing conditions greatly benefited, infant
mortality rates declined, and other significant improvements to public health occurred. In more
recent years, the further reductions in pollution have led to much smaller improvements to
public health. In other words, the marginal benefit to society from reducing pollution has
decreased, while the marginal cost has increased. If the marginal benefit is now less than the
marginal cost, society would actually be made worse off as a result of further pollution
reduction. Economists and scientists are not certain whether the United States has reached this
point yet.
b. Although there would be health benefits of reducing pollution further, it is not clear that the
government should take action to do so. If the marginal benefit of reducing air pollution is
greater than the marginal cost, further reductions will make society better off. But if the
marginal cost of reducing air pollution is greater than the marginal benefit, reducing air
pollution will actually make society worse off. The government needs to quantify the marginal
cost and the marginal benefit of a further reduction in air pollution, and take steps to reduce air
pollution further only if the marginal benefit exceeds the marginal cost.
2.9 The policy is not likely to be economically efficient. Although the benefit to her community from
reducing the amount of illegal drug traffic from its (apparently) currently high levels would be
substantial, at some point the additional benefit from reducing illegal drug use would likely be less
than the additional cost.
2.10 The airline policy does not make it impossible to achieve an economically efficient outcome with
respect to reclining seats. The Coase theorem is the argument that if transactions cost are low,
private bargaining will result in an efficient solution to the problem of externalities. Before an
airline passenger wishes to recline his seat he or she may ask for permission from the person seated
behind. If the second passenger objects to the first passenger reclining his seat, a compromise could
be reached; for example, a partial recline or a complete recline for only part of the flight. Or the
second passenger could make a payment to the first passenger in exchange for the first passenger
agreeing not to recline his seat.
2.11 Replacing reclining airline seats with non-reclining seats would eliminate disputes between
passengers over this issue, but it would not be an economically efficient outcome. Bargaining
between passengers regarding how much seats are allowed to recline can make both parties better
off. This outcome would not be possible if none of the seats were allowed to recline.

Government Policies to Deal with Externalities

5.3 Learning Objective: Analyze government policies to achieve economic efficiency in a
market with an externality.
Review Questions
3.1 A Pigovian tax aims to bring about an efficient level of output in the presence of externalities. The
tax is set equal to the marginal external cost, which is the difference between the marginal social
cost and the marginal private cost.
3.2 To internalize an externality means that the producer or consumer who creates the externality bears
the costs or receives the benefits of the externality. A tax equal to the cost of a negative externality
will cause producers to internalize the negative externality, and a subsidy equal to the benefits of a
positive externality will cause consumers to internalize a positive externality. A private solution
along the lines of the Coase theorem would also internalize an externality.
3.3 Most economists prefer tradable emissions allowances because they allow pollution to be reduced
at the lowest cost. The firm that can reduce pollution cheaply will do so and sell its right to emit
pollution to another firm whose costs of reducing pollution are high. The command-and-control
approach is generally much costlier and, therefore, less efficient because it often forces firms to
adopt expensive methods of pollution control.

3.4 a. Greenhouse gas emissions result from burning coal. The emissions result in external costs–
negative externalities–that are not covered by the price of the coal.
b. If the monetary cost of the externality can be accurately measured, then charging coal
companies for the external cost of the greenhouse gas emissions can result in an economically
efficient outcome.
3.5 A Pigovian tax is set equal to the marginal cost of an externality. In the absence of the tax,
consumers have to bear the cost of the externality. For example, in the absence of a Pigovian tax
on a factory that emits air pollution, consumers are bearing the cost of breathing polluted air. So in
that sense, consumers are “paying” an amount equal to a Pigovian tax even if the government has
not imposed the tax.
3.6 a. If there was a positive externality in producing antibiotics, then the equilibrium in the market
for antibiotics would not occur at the point where the marginal social benefit equals the
marginal social cost so that a government subsidy would be necessary. It’s not clear why this
positive externality in production would exist, though, at least for existing antibiotics. However,
it is possible that the expense and uncertainty of developing new antibiotics might be very high,
particularly given that the majority of pharmaceuticals developed turn out not to be effective
and have to be abandoned before being brought to market—with heavy losses to
pharmaceutical companies. If these costs and uncertainties make it difficult for pharmaceutical
companies to obtain the funds to carry out research and development for new antibiotics, then
a government subsidy might be justified, given the potentially catastrophic consequences that
could result from diseases caused by antibiotic resistant bacteria.

b. Health insurance that covers some or all of the cost of prescriptions for antibiotics allows people
to pay less “out of pocket” for these drugs. As a result, the demand for antibiotics is greater
than it would be in the absence of health insurance coverage of these drugs. Holding all else
constant, we would expect that the result would be higher prices for antibiotics. These higher
prices increase the incentives for pharmaceutical companies to develop new antibiotics and
reduce the need for government subsidies. Whether this factor eliminates the need for
government subsidies is difficult to determine.
3.7 a. Annoying people, including babies who cry on busses and planes, cause a negative
externality because they impose costs on other people around them. Taxing annoying
people, including the parents of the crying children, may discourage people from being
annoying (or encourage parents of crying babies to find alternative methods of keeping their
children quiet). However, the administrative costs of monitoring crying babies and taxing
their parents would be very high. In addition, many people might oppose such a tax because
it would represent a government intrusion into what is usually considered a private matter.
b. People who plant flowers cause a positive externality because they give benefits (for
instance, higher property values) to other people in the neighborhood. Government subsidies
may encourage more people to plant flowers, but again, the administrative
costs of identifying beautiful gardens and deciding on the appropriate subsidy would be very
large.
c. Every negative externality should not be taxed, and every positive externality should not be
subsidized. The government should compare the costs of imposing taxes and subsidies to the
benefits. So if the benefits associated with a Pigovian tax outweigh the costs, a Pigovian tax
would reduce deadweight loss (and increase efficiency). In the cases discussed in parts (a) and
(b) of this problem, administrative costs would likely be too high for taxes or subsidies to be
an effective way of dealing the externalities involved.
3.8 Yes, subsidizing something that generates external benefits can help increase economic
efficiency. However, the funds used to subsidize new technologies may be wasted if the
government subsidizes new technologies that don’t generate enough external benefits to justify
the cost of the subsidy. The U.S. government does subsidize the production of new technology
by providing grants to researchers through the National Science Foundation and other agencies,
as well as granting monopoly privileges through patents and copyrights. Of course,
distinguishing between “good” new technologies and mediocre new technologies is a very
difficult task.
3.9 a. The “mortality effect” is the number of people who die prematurely. The number of people
who die prematurely from being obese is less than the number of people who die from smoking.
By living longer, people who are obese add more costs to society over their lifetimes. In
particular, they are less likely than smokers to die before collecting much in Social Security
and Medicare benefits.
b. Far more people drink soda than smoke, so more people would visibly notice (and be
affected by) taxes on sodas. In addition, with so much discussion in the news over the years
about the negative effects of smoking—including the effects on nonsmokers of “secondhand
smoke”—more people are likely to accept taxes on cigarettes than on soda.

3.10 In the graph below of the market for gasoline, the equilibrium price is initially PMarket and the
equilibrium quantity is QMarket. An increase in the tax on the sellers of gasoline would shift supply
from S1 to S2, resulting in an efficient price of PEfficient and an efficient quantity of QEfficient. In the
graph on page 162, consumers are paying a price P, which corresponds to the price PEfficient in the
graph below. So regardless of whether the gasoline tax is imposed on the buyer or the seller, the
price consumers pay for gasoline is increased to the efficient level.
3.11 a. The tax should be the amount necessary to shift the supply curve from S1 to S2. That amount is
$7.50 – $7.15 = $0.35 per item dry cleaned.
b. The deadweight loss from excessive dry cleaning arises because the efficient number of items
to dry clean is 600,000 per week, but the market equilibrium is 750,000 per week. The
following graph shows that the deadweight loss equals the amount by which the marginal social
cost (S2) of cleaning the last 150,000 items exceeds the marginal benefit (the height of the
demand curve for each of these items). The deadweight loss is shown by area A of the figure
and has a value equal to: 0.5 × $0.35 × 150,000 = $26,250. (Note: We know that the base of
the deadweight loss triangle must be $0.35 because S2 is parallel to S1, so the distance between
them is constant.)

3.12 The efficient level of toilet paper production will occur where the demand curve intersects with the
marginal social cost curve. So the efficient level of production will be 350,000 tons, and the
efficient price will be $150 per ton. If the government imposes a tax of $50 per ton (the difference
between the marginal private cost and the marginal social cost), supply will shift from S1 to S2,
resulting in the efficient price and quantity.
3.13 a. The efficient amount of crime is where the marginal benefit (from increased
safety, reduced property losses, increased peace of mind, and so forth) of reducing crime
equals the marginal cost (from the salaries of additional police officers, the cost of additional
squad cars, the cost of building and operating additional prisons, and so forth) of reducing
crime.
b. The tax is a Pigovian tax because it attempts to push the quantity of crime toward its efficient
level. Assuming that the marginal benefit of reducing crime is currently greater than the
marginal cost—so that the current level of crime is inefficiently high—Governor Patrick’s
proposal would have increased economic efficiency.
3.14 a. Marginal external cost is the difference between the marginal social cost curve and the marginal
private cost curve. In this case, marginal external cost must be rising as output increases, so the
gap between the marginal private cost curve and the marginal social cost curve gets larger as
output increases.
b. The optimal Pigovian tax can be determined by first finding the efficient level of output, which
is at the intersection of the demand curve and the marginal social cost curve. At this output, the
optimal tax equals the gap between the social cost and the private cost curves—that is, it equals
the amount of the marginal external cost. Therefore, in the large city the

optimal tax is $6.60 − $5.40 = $1.20, but in the small city the optimal tax is only $5.60 – $5.00
= $0.60. The efficient tax is larger in the large city because demand is greater and marginal
social cost increases as the quantity of items cleaned per week increases.
3.15 a. If a carbon tax was set equal to the external cost of carbon emissions, power generating plants
would have the freedom and financial incentive to use the least costly means of reducing their
carbon emissions. The tax could be varied over time if the cost of carbon emissions changed.
Directly regulating how power plants in each state generate electricity, on the other hand, may
require all plants to adopt the same technology or reduce emissions by the same amount.
Typically, costs of reducing pollution are lower if firms are free to adopt the most appropriate
methods rather than having to use a “one-size-fits-all” approach.
b. Although most economists favor taxes and other market-based approaches over “command and
control” approaches to reduce emissions of carbon dioxide, many people–including
government officials–object to market-based policies giving producers what is disapprovingly
called a “license to pollute.” Policymakers may favor a “command and control” approach for
another reason: The cost to consumers of reducing emissions is less visible than with a carbon
tax. Imposing taxes for any reason is not a popular option for elected officials.
3.16 a. The burden of a tax refers to who actually ends up paying the tax. In this case, the Congressional
Budget Office report suggests low-income households would disproportionately pay more of the
carbon tax in the form of higher gasoline and electricity prices.
b. Because lower-income households spend a larger fraction of their income on gasoline, heating
fuel, and electricity, they would bear a proportionally larger share of the tax. One way to reduce
the burden on these households would be to give them tax rebates financed from the revenue
the government collects from the carbon tax.

Four Categories of Goods

5.4 Learning Objective: Explain how goods can be categorized on the basis of whether
they are rival or excludable and use graphs to illustrate the efficient quantities of
public goods and common resources.
Review Questions
4.1 Rivalry occurs when one person’s consumption of a unit of a good means that no one else can
consume it. Excludability occurs when anyone who doesn’t pay for a good cannot consume it.
Goods that are both rival and excludable are called private goods, which are most of the goods we
consume. Goods that are rival, but nonexcludable, are called common resources—such as fish in
the sea. Goods that are both nonrival and nonexcludable are called public goods. Goods that are
nonrival, but excludable, are called quasi-public goods.
4.2 Free riding is benefitting from a good without paying for it. A public good is nonrival and
nonexcludable. Because anyone can get it without paying for it once it has been produced—
attempting to “free ride” —there is little incentive for firms to supply the good because they can’t
cover their costs if people don’t pay for the good. Free riding will lead to market failure: Less than
the economically efficient amount of a public good will be produced.
4.3 The tragedy of the commons is the tendency of a common resource to be overused. It can be avoided
if there is a way to block overuse. One method is to give someone or some group a property right to
the resource, which would give the person or group the incentive to use the resource efficiently.
However, this won’t work well if the person or group cannot easily enforce the property right.

4.4 Because no one is prevented from riding on the merry-go-round it is nonexcluable for those who
visit the park. But the merry-go-round is rival because when one person is seated no one else can
ride on the same seat. When the number of people who wish to ride on the merry-go-round exceeds
the number of seats, some people must wait for their turn. The merry-go-round is better classified
as a common resource.
4.5 a. The optimal quantity of a public good is the quantity where the public’s marginal benefit from the
good—as represented by the demand curve—is equal to the marginal cost of providing the good.
To determine the optimal quantity we need to know the demand curve for the city park and the
marginal cost to the town of providing acres of parkland. To calculate the overall demand we need
to add the dollar amounts that Jill and Joe are willing to pay for each quantity:

The graph shows that the optimal size park—where marginal social cost equals marginal social
benefit—is four acres.
b. The marginal cost of supplying the second acre is $13. But the demand curve tells us that the
marginal benefit Jill and Joe receive from the second acre is $21. Because the marginal benefit to
society is well above the marginal cost, two acres cannot be the optimal size for the town park.
4.6 The tragedy of the commons is the tendency for a common resource to be overused. Because whales
are a common resource, in the absence of agreements among governments to control whaling,
several species have been hunted to near extinction.
4.7 Clean air and the village green are both common resources: They are rival and not excludable. Just
as one farmer using the pasture leaves less grazing space for other farmers, one person polluting
the air leaves less clean air for other people. Because they are not private goods, neither the
pastureland nor the air can be excluded from use.
4.8 a. Herd immunity has characteristics of a public good in that if only one person is not vaccinated
against a disease, this person will not contract the disease. Therefore, in this case, immunity is
nonexcludable. However, if more than one person is not vaccinated against the disease,
immunity is not guaranteed. And if more than one person is not vaccinated, then immunity is
rival; that is, the likelihood of contracting the disease increases as the number of people who
are not vaccinated increases. It is difficult to determine how many people would have to be
vaccinated in order for those who did not get vaccinated to be immune from the disease.
Therefore, herd immunity is not a “classic public good” as, for example, national defense is.
b. A free rider refers to a person who does not pay for a good because he or she will receive the
good anyway. Although there is an incentive for someone to be a free rider by not getting a
vaccination against a disease such as measles, if many people are not vaccinated, then immunity
is not assured and free riding will result in the spread of the disease. In fact, many people justify
not receiving vaccinations for reasons other than receiving herd immunity; they may be
uncomfortable being injected with hypodermic needles or fear side effects from vaccinations.
c. Most people vaccinate their children and many adults receive vaccinations to prevent
contracting influenza because vaccinations offer a higher probability than free riding of being
immune from disease.
4.9 Private goods are (b) home mail delivery (you’ll be excluded if you don’t use a stamp),
(d) education in a private school, and (g) an apple. Public goods are (a) a television broadcast
(assuming that it is an over-the-air broadcast; a cable broadcast would be a quasi-public good
because it is excludable but not rival) and (f) hiking in a park without a fence. Hiking in a park
surrounded by a fence (e) is a quasi-public good because it is excludable but not rival. Education
in a public school (c) is a common resource—at least for people within the school district who
won’t be excluded. It is rival because as more students crowd into a classroom, the amount of
attention the teacher gives to each student declines. In cases where it isn’t rival, it would be a public
good for those who are eligible.

4.10 DirecTV pays the National Football League a fee to broadcast Sunday games. Because Barney pays
for this program package, he is not a free rider. Barney’s friends can be considered free riders
because they benefit watching Sunday games without paying for them. However, Barney can end
the free riding if he chooses to do so; for example, if his friends leave his living room without
picking up after themselves or root against Barney’s favorite team he can stop inviting them over.
4.11 If Jeff and James made this response they would be free riders. They know that whatever amount
they pledge to pay for the national defense they would receive the same amount of protection as
everyone else. In other words, private provision of national defense would suffer from
nonexcluability. Jeff, who is a supporter of a strong defense capability, would realize that no matter
how much of his income he pledged it would too little to have an impact on the amount of protection
the nation would receive.
4.12 The village elders were trying to prevent the tragedy of the commons. Their solution worked quite
well given the small size of the village.

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CHAPTER 5 | Externalities, Environmental

5.2 Private Solutions to Externalities: The Coase Theorem (pages 151–158)

5.3 Government Policies to Deal with Externalities (pages 158–165)

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5.4 Four Categories of Goods (pages 165–173)

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Externalities and Economic Efficiency (pages 148–151)

A. The Effect of Externalities

B. Externalities and Market Failure

C. What Causes Externalities?

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Extra Solved Problem 5.1

Step 2: Draw a graph to illustrate the externality at Ike’s Bar-B-Q Pit.

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Private Solutions to Externalities: The Coase Theorem (pages 151–158)

A. The Economically Efficient Level of Pollution Reduction

B. The Basis for Private Solutions to Externalities

C. Do Property Rights Matter?

D. The Problem of Transactions Costs

E. The Coase Theorem

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Extra Solved Problem 5.2

Solving the Problem

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Government Policies to Deal with Externalities (pages 158–165)

A. Imposing a Tax When There Is a Negative Externality

B. Providing a Subsidy When There Is a Positive Externality

C. Command-and-Control versus Market-Based Approaches

D. The End of the Sulfur Dioxide Cap-and-Trade System

E. Are Tradable Emissions Allowances Licenses to Pollute?

Extra Solved Problem 5.3

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Solving the Problem

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Four Categories of Goods (pages 165–173)

A. The Demand for a Public Good

B. The Optimal Quantity of a Public Good

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Extra Economics in Your Life:

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Solutions to End-of-Chapter Exercises

Externalities and Economic Efficiency

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Problems and Applications

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1.11 a. A positive externality arises from studying.

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Private Solutions to Externalities: The Coase Theorem

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Problems and Applications

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Government Policies to Deal with Externalities

Problems and Applications

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Copyright © 2017 Pearson Education, Inc.

Copyright © 2017 Pearson Education, Inc.