Consider the table. Number of street lamps 1 2 3 4 5 6 7 Marginal benefit (in $) 30 26 22 18 14 10 6 Suppose that a small town wants to install street lamps, which are nonrival in consumption and nonexcludable. Each of the 25 people in the town value street lamps according to the given schedule. Street lamps each cost $250 to install. Use this information to answer the questions. What is the socially optimal number of street lamps?   street lampsstreet lamps Suppose that 20 of the 25 townspeople decide that they will not help pay for street lamps, and will instead enjoy (for free) the street lamps built by the other five people. What is the maximum number of street lamps that will be built by the remaining five people?   street lampsstreet lamps Suppose the town government decides to build street lamps and pay for the street lamps through taxation. How much should each person be taxed to pay for the optimal number of street lamps if everyone is taxed equally? $

Vork (Ch 10) 2. Efficiency in the presence of externalities Cars impose 'many external costs on society: exhaust emissions that contribute to air pollution, congestion on roadways, and so on. Therefore, the market equilibrium quantity of cars is not equal to the socially optimal quantity. The following graph shows the demand for cars (their private value), the supply of cars (the private cost of producing them), and the social cost of cars, including both the private cost and external costs. Use the black point (plus symbol) to indicate the market equilibrium quantity. Next, use the purple point (diamond symbol) to indicate the socially optimal quantity. Social Cost Market Equilibrium Supply (Private Cost) Socially Optimal Level Demand (Private Value) QUANTITY OF CARS PRICE OF CARS

Consumers A, B, C, and D respectively have a willingness to pay of $130, $100, $80, and $50 for one widget. Firms W, X, Y, and Z each have capacity to produce one widget at respective costs of $10, $60, $90, and $110. If these are the only consumers and firms in this market, and there are no third party costs or benefits from widgets, what is the socially efficient quantity of widgets? 4 There is insufficient info to answer question 3 2

If it costs $6 to purchase & plant a tree, what is the socially optimal number of trees to be purchased? answer: [x] trees

Suppose Troutsville (population of 4) wants to put on a firework display. Leslie would get $40 worth of benefit, Mark would get $30 worth of benefit, Maggie would get $20 worth, and Erika would get $10 worth. What is the socially efficient amount to spend on the display? a. $25, the average of their benefitsb. $10, the minimum of their benefitsc. $40, the max of their benefitsd. impossible to telle. $100, the sum of their benefits

The equations below represent the demand and supply curves for annual gym memberships in a city. qD= 500 − 2p,   qS=0.5p − 50 Because physical activity leads to better health, the city estimates that each annual gym membership saves $30 of public spending on healthcare per year (a positive externality). a. In a graph, show the market and the socially optimal equilibria for annual gym memberships in this city. Does the market equilibrium result in under- or over-consumption of memberships? What is the deadweight loss associated with the market failure in this situation? b. Would you recommend this city to implement a subsidy (a negative Pigouvian tax) to correct this market failure? If so, how much would be the subsidy per unit? What would be the effects of your proposed policy on the quantity, price, and aggregate welfare?

5) Mr. Leon is at it again! He vandalized a public park. Now society has to clean it up. Based on the numbers below what would be the socially optimal amount that should be cleaned up? % cleaned total benefits total costs 25 $10,000 $1,000 50 $15,000 $4,000 75 $18,000 $7,000 100 $19,000 $10,000 *Show the marginal benefits and marginal costs, graphically.

A global-positioning anti-theft device installed by one car owner can produce a positive spillover to other citizens in a community. Discuss the impact on the: (1)  Private benefit curve (2) Social benefit curve (3)  Private cost curve

No hand written solution Afirm has an industrial plant that emits pollutants into a town’s lake. The plant’s marginal abatement function is MAC= 200 – 0.5E and damages caused by its emissions are given by MD = 2E where emissions are in kg. per day. What is the socially efficient level of emissions from this plant? Illustrate this in a graph.   As an incentive to reduce emissions to the socially efficient level, government offers to pay the firm for each kg. of emissions it abates per day from this plant.   What subsidy per kg. should the government offer? If the plant abates to the socially efficient level of emissions, what total subsidy payment would the firm receive? Identify the area in your graph. How much better or worse off would the firm be compared to if it did no abating? Identify the area in your graph. What would be the net benefit to society if we pay the firm to reduce the plant’s emissions to the socially efficient level? Identify this area in your graph.

Consider the table. Number of street lamps Marginal benefit (in $) 123 4 5 6 7 30 26 22 18 14 10 6 Suppose that a small town wants to install street lamps, which are nonrival in consumption and nonexcludable. Each of the 25 people in the town value street lamps according to the given schedule. Street lamps each cost $250 to install. Use this information to answer the questions. What is the socially optimal number of street lamps? Suppose that 20 of the 25 townspeople decide that they will not help pay for street lamps, and will instead enjoy (for free) the street lamps built by the other five people. What is the maximum number of street lamps that will be built by the remaining five people? Suppose the town government decides to build street lamps and pay for the street lamps through taxation. How much should each person be taxed to pay for the optimal number of street lamps if everyone is taxed equally? S I street lamps street lamps