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© 2013 Pearson
Externalities
10
CHECKPOINTS
© 2013 Pearson
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Checkpoint 10.1
Checkpoint 10.2
Problem 1
Problem 1
Problem 2
Problem 2
Problem 3
Problem 3
Problem 4
Problem 4
In the news
In the news
© 2013 Pearson
CHECKPOINT 10.1
Practice Problem 1
The figure shows the unregulated
market for a pesticide. When
factories produce pesticide, they
create waste and dump it into a lake.
The marginal social cost of
producing the pesticide is double the
marginal private cost.
What is the quantity of pesticide
produced if no one owns the lake?
What is the efficient quantity of
pesticide?
© 2013 Pearson
CHECKPOINT 10.1
Solution
The quantity of pesticide
produced is 30 tons a week.
The efficient quantity of
pesticide is 20 tons a week.
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CHECKPOINT 10.1
Practice Problem 2
The figure shows the unregulated
market for a pesticide. When
factories produce pesticide, they
create waste and dump it into a lake.
The marginal external cost of the
waste equals the marginal private
cost of producing the pesticide.
If the residents own the lake, what is
the quantity of pesticide produced?
How much do residents charge the
factories to dump waste?
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CHECKPOINT 10.1
Solution
The quantity of pesticide
produced is the efficient quantity,
20 tons a week.
The townspeople charge the
factories $50 a ton of pesticide,
which is the marginal external
cost of the pollution produced by
20 tons a week.
© 2013 Pearson
CHECKPOINT 10.1
Practice Problem 3
The figure shows the unregulated
market for a pesticide. When factories
produce pesticide, they create waste
and dump it into a lake.
The marginal external cost of the
waste is equal to the marginal private
cost of producing the pesticide.
If the pesticide factories own the lake,
how much pesticide is produced?
© 2013 Pearson
CHECKPOINT 10.1
Solution
The factories produce the
efficient quantity: 20 tons a week.
© 2013 Pearson
CHECKPOINT 10.1
Practice Problem 4
The figure shows the unregulated
market for a pesticide. When factories
produce pesticide, they create waste,
which they dump into a lake.
The marginal external cost of the
waste is equal to the marginal private
cost of producing the pesticide.
If no one owns the lake and the
government levies a pollution tax, what
is the tax per ton of pesticide that
achieves the efficient outcome?
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CHECKPOINT 10.1
Solution
The government can achieve an
efficient outcome if it levies a
pollution tax equal to the
external cost because this tax
confronts the factories with the
social cost of pollution.
A pollution tax of $50 a ton paid
by the factories achieves the
efficient quantity of pesticide.
© 2013 Pearson
CHECKPOINT 10.1
In the news
New power-plant rule aids Northeast
A new Obama air pollution rule requires coal-fired power
plants to reduce both smog and acid-rain causing
pollutants. The coal industry says this rule is among the
most expensive ever imposed by the EPA.
Source: The Wall Street Journal, July 7, 2011
Explain how a limit on pesticide will change the efficiency
of the strawberry industry.
Would a cap-and-trade scheme be more efficient?
© 2013 Pearson
CHECKPOINT 10.1
Solution
To reduce the amount of pollution, power plants must
produce less.
The quantity of electricity decreases and the price that
consumers pay for electricity rises.
The outcome is efficient if the quantity of electricity
produced is that at which the marginal social cost of
electricity equals its marginal benefit.
© 2013 Pearson
CHECKPOINT 10.2
Practice Problem 1
The figure shows the marginal private
benefit from college education.
The marginal cost of a college education
is a constant $6,000 a year. The
marginal external benefit from a college
education is $4,000 per student per year.
What is the efficient number of students?
If all colleges are private, how many
people enrol? What is the tuition and the
deadweight loss?
© 2013 Pearson
CHECKPOINT 10.2
Solution
The efficient number of
students is 50,000 a year—the
intersection of the MSB and
MC curves.
Only 30,000 students a year—
the intersection of the MB and
MC curves —will enrol.
Tuition is $6,000 a year.
The area of the gray triangle
equals the deadweight loss.
© 2013 Pearson
CHECKPOINT 10.2
Practice Problem 2
The figure shows the marginal private
benefit from college education.
The marginal cost of a college
education is a constant $6,000 a year.
The marginal external benefit is $4,000
per student per year.
If the government decides to provide
public colleges, what tuition will these
colleges charge to achieve the efficient
number of students?
How much will taxpayers have to pay?
© 2013 Pearson
CHECKPOINT 10.2
Solution
To enroll the efficient number of
student (50,000 students), public
colleges would charge $2,000 per
student.
Taxpayers would pay $4,000 per
student.
© 2013 Pearson
CHECKPOINT 10.2
Practice Problem 3
The figure shows the marginal private
benefit from college education.
The marginal cost of a college education is
a constant $6,000 a year. The marginal
external benefit from a college education is
$4,000 per student per year.
If the government decides to subsidize
private colleges, what subsidy will achieve
the efficient number of college students?
© 2013 Pearson
CHECKPOINT 10.2
Solution
The efficient number of
students is 50,000 a year—the
intersection of the MSB and
MC curves.
The subsidy would be $4,000
per student, which is equal to
the marginal external benefit.
© 2013 Pearson
CHECKPOINT 10.2
Practice Problem 4
The figure shows the marginal private
benefit from college education.
The marginal cost of a college education is
a constant $6,000 a year.
The marginal external benefit from a
college education is $4,000 per student per
year.
If the government offers vouchers to those
who enroll at a college and no subsidy,
what is the value of the voucher that will
achieve the efficient number of students?
© 2013 Pearson
CHECKPOINT 10.2
Solution
The efficient number of students
is 50,000 a year—the intersection
of the MSB and MC curves.
Enrollment will be 50,000 if the
tuition is $2,000.
The private college tuition is
$6,000, so to get 50,000 students
to enrol, the value of the voucher
will have to be $4,000.
© 2013 Pearson
CHECKPOINT 10.2
In the news
Tuition hikes, not loan access, should frighten students
Despite the hard times, families will not be deprived of
access to federal student loans. The real danger is a hike in
tuition. Often in past recessions, states have cut funding for
colleges and tuition has skyrocketed. The Cato Institute says
a better policy would be for the states to maintain the
subsidies to colleges.
Source: Michael Dannenberg, USA Today, October 22, 2008
(a) If government cuts the subsidy to colleges, why will
tuition rise and the number of students enrolled decrease?
© 2013 Pearson
CHECKPOINT 10.2
(b) Why does the Cato Institute say that it’s a better
policy for government to maintain the subsidy?
Solution
A cut in the subsidy will increase the college’s marginal
cost.
Tuition will rise and the number of students will
decrease—a movement up along the demand curve.
Because fewer than the efficient number of students will
be educated, the Cato Institute says maintaining the
subsidy is a better policy.
© 2013 Pearson