S2W10

Aladdin is struggling to match up the following definitions. Help him match the 3 different solutions to overcoming externalities. (The next 2 questions are a continuation of this question)

Coase Theorem

• Implementing direct fees to the externality

• Use taxes (or subsidies) to align the private and social costs (or benefits) by internalising externalities

• We can reach the social optimum by assigning enforceable property rights and allowing the market to take over

Pigouvian Taxes

• Implementing direct fees to the externality

• Use taxes (or subsidies) to align the private and social costs (or benefits) by internalising externalities

• We can reach the social optimum by assigning enforceable property rights and allowing the market to take over

Emission Fees

• Implementing direct fees to the externality

• Use taxes (or subsidies) to align the private and social costs (or benefits) by internalising externalities

• We can reach the social optimum by assigning enforceable property rights and allowing the market to take over

Aladdin is further struggling with economic terminology and is struggling to match up the following. Help him match up the phenomena that you might encounter with chocolate to the Economic theory they represent.

The next three questions are a continuation of this one.

Positive Externality

• You and your friends fail to locate the lost egg on the easter egg hunt

• The easter bunny running around at night stops you from sleeping.

• You buying chocolate for the flat makes everyone happy

• The easter bunny eats all of the carrots in the field so there are none for the normal bunnies

Negative Externality

• You and your friends fail to locate the lost egg on the easter egg hunt

• The easter bunny running around at night stops you from sleeping.

• You buying chocolate for the flat makes everyone happy

• The easter bunny eats all of the carrots in the field so there are none for the normal bunnies

Tragedy of the Commons

• You and your friends fail to locate the lost egg on the easter egg hunt

• The easter bunny running around at night stops you from sleeping.

• You buying chocolate for the flat makes everyone happy

• The easter bunny eats all of the carrots in the field so there are none for the normal bunnies

Social Suboptimum

• You and your friends fail to locate the lost egg on the easter egg hunt

• The easter bunny running around at night stops you from sleeping.

• You buying chocolate for the flat makes everyone happy

• The easter bunny eats all of the carrots in the field so there are none for the normal bunnies

Pigouvian Taxes lead to the Blank 1 consumption of the externality producing good but it also raises Blank 2 . One of the limitations of Pigouvian taxes is that we need to know people’s Blank 3 over goods and the external Blank 4 in order to implement them.

Jasmine wants to go out and drink to celebrate St. Patrick’s Day (more so than usual). The ensuing partying and hangovers lead to a loss of productivity. Is this productivity loss an example of a negative externality?

• Yes

• No

Consider the the market for chocolate in Agrabah, where the inverse demand curve is given by P=80-Q. The private marginal cost of production of all chocolate-producing firms is given by MC=20+2Q. Chocolate production pollutes, hence the marginal external cost of chocolate production is MEC=0.75Q. Calculate the output of chocolate if it’s produced under competitive conditions without regulation and compare this to the socially efficient price and output.