8/3/2019 Micro Ch10 ICA Ex Tern Ali Ties

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Economics Dr. Katie Sauer

Externalities (ch 10)

1. Consider the market for fire extinguishers.

a. Why might fire extinguishers exhibit positive externalities?

b. Draw a graph of the market for fire extinguishers, labeling the demand curve, the social benefitscurve, the supply curve, and the social costs curve. Indicate both the market equilibrium and the sociallyoptimal outcome.

c. If the external benefit is $10 per extinguisher, describe a government policy that could move themarket outcome in line with the socially optimal outcome.

2. An externality exists whenevera. the economy cannot benefit from government intervention.b. markets are not able to reach equilibrium.c. a firm sells its product in a foreign market.

d. a person engages in an activity that influences the well-being of a bystander and yet neither pays norreceives payment for that effect.

3. Since restored historic buildings convey a positive externality, local governments may choose toa. regulate the demolition of them.b. provide tax breaks to owners who restore them.c. increase property taxes in historic areas.d. Both a and b are correct.

8/3/2019 Micro Ch10 ICA Ex Tern Ali Ties

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Economics Dr. Katie Sauer

5. If a paper manufacturer does notbear the entire cost of the dioxin it emits, it willa. emit a lower level of dioxin than is socially efficient.b. emit a higher level of dioxin than is socially efficient.c. emit an acceptable level of dioxin.d. not emit any dioxin in an attempt to avoid paying the entire cost.

6. This graph illustrates the market for 2-liter bottles of soda.

7. This graph illustrates the market for measles vaccines.

Supply

Demand Social Value

2 4 6 8 10 12 1 4 16 1 8 2 0 22 Quantity

2

4

6

8

10

12

14

16

18

20

22

24

26

Price

The Market Outcome is:Quantity = Price =

The Socially Optimal Outcome is:Quantity = Price=

Does the market over or under produce2-liter bottles of soda?

Is this an example of a negative orpositive externality?

The Market Outcome is:Quantity = Price =

The Socially Optimal Outcome is:Quantity = Price=

Does the market over or under produce measlesvaccines?

Is this an example of a negative or positiveexternality?