1.) What type of externality (positive or negative) is described in
each of the following examples? Is the marginal social benefit
of the activity greater than or equal to the marginal benefit to
the individual? Is the marginal social cost of the activity
greater than or equal to the marginal cost to the individual?
Consequently, without intervention, will there be too little or
too much (relative to what would be socially optimal) of this
activity?
a. Mrs. Chau plants lots of colorful flowers in her front yard.
b. Anna Crombie and Fritz, a popular clothing store, opens in
a mall, attracting more shoppers who also visit other stores.
c. The fraternity next to your dorm plays loud music, keeping
you from studying.
d. Maija, who lives next to an apple orchard, decides to keep
bees to produce honey.
e. Justine buys a large SUV that consumes a lot of gasoline.
Education is an example of a positive externality: acquiring more
education benefits the individual student and having a more
highly educated work force is good for the economy as a whole.
The accompanying table illustrates the marginal benefit to Sian
per year of education and the marginal cost per year of education.
Each year of education has a marginal external benefit to
society equal to $8,000. Assume that the marginal social cost is
the same as the marginal cost paid by an individual student.
Quantity of Total social Total cost
steel (tons) benefit to producers
1 $115 $10
2 210 30
3 285 60
4 340 100
5 375 150
Quantity of Sian’s marginal Sian’s
education benefit marginal cost
(years) per year per year
9
$20,000 $15,000
10
19,000 16,000
11
18,000 17,000
12
17,000 18,000
13
16,000 19,000
14
15,000 20,000
15
14,000 21,000
16
13,000 22,000
17
a. Find Sian’s market equilibrium number of years of education.
b. Calculate the marginal social benefit schedule. What is
the socially optimal number of years of education?
c. You are in charge of education funding. Would you use a
Pigouvian tax or a Pigouvian subsidy to induce Sian to
choose the socially optimal amount of education? How high
would you set this tax or subsidy per year of education?
each of the following examples? Is the marginal social benefit
of the activity greater than or equal to the marginal benefit to
the individual? Is the marginal social cost of the activity
greater than or equal to the marginal cost to the individual?
Consequently, without intervention, will there be too little or
too much (relative to what would be socially optimal) of this
activity?
a. Mrs. Chau plants lots of colorful flowers in her front yard.
b. Anna Crombie and Fritz, a popular clothing store, opens in
a mall, attracting more shoppers who also visit other stores.
c. The fraternity next to your dorm plays loud music, keeping
you from studying.
d. Maija, who lives next to an apple orchard, decides to keep
bees to produce honey.
e. Justine buys a large SUV that consumes a lot of gasoline.
Education is an example of a positive externality: acquiring more
education benefits the individual student and having a more
highly educated work force is good for the economy as a whole.
The accompanying table illustrates the marginal benefit to Sian
per year of education and the marginal cost per year of education.
Each year of education has a marginal external benefit to
society equal to $8,000. Assume that the marginal social cost is
the same as the marginal cost paid by an individual student.
Quantity of Total social Total cost
steel (tons) benefit to producers
1 $115 $10
2 210 30
3 285 60
4 340 100
5 375 150
Quantity of Sian’s marginal Sian’s
education benefit marginal cost
(years) per year per year
9
$20,000 $15,000
10
19,000 16,000
11
18,000 17,000
12
17,000 18,000
13
16,000 19,000
14
15,000 20,000
15
14,000 21,000
16
13,000 22,000
17
a. Find Sian’s market equilibrium number of years of education.
b. Calculate the marginal social benefit schedule. What is
the socially optimal number of years of education?
c. You are in charge of education funding. Would you use a
Pigouvian tax or a Pigouvian subsidy to induce Sian to
choose the socially optimal amount of education? How high
would you set this tax or subsidy per year of education?