Chapter 9
Answers to pause for thought questions
p214
Give three other examples of external costs of production.
Exhaust fumes from badly maintained trucks and buses, aircraft noise, smoke from
forest fires (notably in Indonesia).
p216
What are some other examples of public goods?
The legal framework. lighthouses
p218
Assume that a monopoly existed in an industry where there were negative
externalities. Could the socially efficient output be Qm in Figure 6.4? If so, would
this make monopoly socially efficient?
The socially efficient output would be Qm if the negative externalities were such
that the marginal social cost curve passed through point b. Monopoly would not,
however, be socially efficient in the sense that the profit would be supernormal. To
counteract this problem, a lump-sum tax could be imposed on the monopoly. This
would reduce the monopoly’s profits but, being unrelated to output, would not
affect the output that the monopoly would choose (i.e. output would stay at Qm.)
p219
How might shareholders try to ensure that managers act in the shareholders’
interests?
By tying managers’ renumeration to the profits of the company or, through the
granting of share options, to the company’s share price.
p220
How do merit goods differ from public goods?
They could be provided by the market (albeit with too little consumed). The
problem of non-excludability does not apply.
p223
Why might it be better to ban certain activitiesthat cause environmental damage
rather than tax them?
Because some activities cause so much environmental damage that the best
outcome is that they not be permitted at all. The tax solution reduces the level of the
activity; it does not aim to eliminate it.
p225
What protection to property rights in the real world give to sufferers from noise
from (a) neighbours; (b) traffic; (c) mobile ‘phones in restaurants?
(a) Protection, through the courts, from extreme cases of nuisance caused by noisy
neighbours. There is very little protection from everyday irritation cause by
neighbour’s radios, music, etc.
(b) None.
(c) Some restaurances ban mobile phones and, to the extent, this is enforced the
(potential) sufferers are protected. In general however, there is no protection..
p237
To what extent will the introduction of tradable permits lead to a lower level of
total pollution (as opposed to its redistribution)?
It will depend on the total level of pollution permitted (i.e. the addition of all the
tradable permits). The lower the permitted level of pollution, the lower will be the
actual level of pollution. If the system merely permits the previous total level of
pollution, clearly there will be no reduction in pollution, merely a more efficient
level of production: i.e. total output will be higher for a given level of pollution as
the lower-polluting firms expand and the higher polluting firms contract.