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Lecture 5

ECON 402 Lecture 5: 5

Course Code
ECON 402
William Crowley

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a) Tom and Jacob will have a positive externality from
b)Tom studies more and acts more efficiently
The economically efficient level of pollution is that amount
where the marginal cost of pollution reduction equals the
marginal benefit of pollution reduction.
The Coase Theorem states that if transaction costs arelow,
private bargaining will result in an efficient solution to the
problem of externalities. The parties involved in an
externality have an incentive to reach an efficient solution because both parties become better off when
an efficient solution is reached.
a) Crying babies on a bus or plane are examples of naturally occurring human behavior and preferences
in which government intervention would be more disruptive than helpful.
b) They do cause a positive externality because others enjoy the beauty without expending any effort.
Since not everyone enjoys flowers, it does not necessarily improve public welfare and should not be
c) A Pigovian tax should only be used when private solutions to externalities are unworkable, and the
external benefits and/or costs are measureable.
When the cost of pollution, in the form of a tax, is
added to the marginal private cost, the marginal
social cost is higher than the marginal private cost.
The price by consumers is higher than the initial
market equilibrium price and the equilibrium
quantity is lower than the initial market equilibrium
4.4A public good is both nonrival and nonexcludable. Public goods are often, although not always,
supplied by a government rather than private firms. The classic example of a public good is national
defense. Your consuming national defense does not interfere with your neighbor consuming it, so
consumption is nonrival.
You also cannot be excluded from consuming it, whether you pay for it or not. No private firm would be
willing to supply national defense because everyone can consume national defense whether they pay for
it or not. You can be excluded from riding a merry-go-round with a charge. The city has chosen not to
charge for the ride, but because they could, this does not meet the criteria of a public good.
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