Economics

Externalities

Dept. of Economics @ NCKU

Weng, Ming-Hung
 Q1
Taking external cost into MC (Social)
account, the socially
efficient level of electricity MC (Private)
production with external
cost of $0.1 per unit , is
____ the equilibrium in
the private market.
1. higher than
2. lower than
3. the same as
 Q2
Which of the following
is Pigouvian subsidy
1. pension
2. childbirth subsidy
3. disability subsidy
4. unemployment
compensation
Babies
 Q3
Private benefit To achieve the
Social benefit efficient amount of
baby birth, the
government has to
subsidize each baby
by ___ thousands.
1. 0
2. 10
3. 20
Babies
4. 50
 Q4
Profits Per Day
Without Filter With Filter
Fred $130 $130
Anne $90 $140

Suppose it costs another $30 to install the filter. If Fred

has the right of (polluting) the river.
1. He will just pay to install the filter (F=100, A=140)
2. Anne may pay Fred $20 to install the filter (120, 120)
3. Anne may pay Fred $40 to install the filter (140, 100)
4. Anne may pay Fred $60 to install the filter (160, 80)
 Q5
Profits Per Day
Without Filter With Filter
Fred $130 $130
Anne $90 $140

Suppose it costs another $30 to install the filter and

Anne has the right of the clean river
1. Fred pays Anne $30 not to install the filter (100, 120)
2. Fred will pay to install the filter (100, 140)
3. Anne may pay Fred $40 to install the filter (140, 100)
4. Anne may pay Fred $60 to install the filter (160, 80)
 Q6
A road between the suburbs and downtown is
congested at rush hour. If 50 people use the road
at rush hour, the trip takes 20 minutes. If the 51st
person enters the road, everyone has to slow
down and the trip now takes 21 minutes. People
value their time at $0.10 per minute. For
simplicity, ignore all of the costs of using the road
other than the cost of time. The marginal social
cost of the 51st person
1. $2.1; 2. $5.1; 3. $7.1; 4. $12.1
 Q7
If 50 people use the road at rush hour, the trip
takes 20 minutes. If the 51st person enters the
road, the trip now takes 21 minutes. People
value their time at $0.10 per minute. The
governor of this state would like to institute a
toll that would equal the costs the last (51st)
driver imposes on the other drivers. How high
should the toll be on this 51st drive during
rush hour?
1. $5; 2. $7; 3. $10.1; 4. $13.1