Goods that are accompanied by negative externalities are priced lower than is socially ideal. But, oddly, goods that are accompanied by positive externalities are also priced lower than is socially ideal. Explain this apparent paradox.

Which of the following statements is correct?     a.) Economic analyses can often do a reasonable job of evaluating the net benefits from some re-allocation of environmental resources. Policymakers should thus feel comfortable in choosing among alternative policies according to whichever one yields the highest net benefits.   b.)Basic benefit-cost analysis, as typically practiced in the U.S., assumes that the marginal value of an extra dollar of net benefits is the same for everyone.   c.)All socially optimal allocations are efficient, but the reverse is not true.   d.)There is always a tradeoff between efficiency and equity. A reallocation of environmental resources that improves efficiency cannot also improve equity, and vice versa.

Which of the following is NOT part of the Coasian Solution to the problem of externalities? Clearly and fully define property rights. Make individuals pay compensation if they infringe upon the property rights others. Prevent parties from negotiating with one another regarding infringements of property rights caused by externalities. None of the above answers is correct (since each choice is part of the Coasian Solution to the problem of externalities).

A local government is considering building new public hiking trails in town.Suppose that the trails are public goods. There are two types of people in a smalltown economy, 1000 avid hikers and 1000 non-hikers, who have typical individualmarginal benefit curves: MB_H = 350 − 5Q and MB_N = 240 − 6Q for the hikersand the non-hikers respectively, where Q is the miles of trails. On the same graph,draw the marginal benefit curves for each type of person and MB of the overalleconomy. If the marginal cost providing this public good is $27000 per mile whatis the optimal level of the public good?

12

A small town provides a fireworks display, which is a public good, every fourth of July. For simplicity, assume the town only has two residents: Hayden and Madison. Their demands for the fireworks display are illustrated in the figure to the right. Construct the market demand curve for this public good. 8.00 7.50- 7.00- 6.50- 6.00- 5.50- 5.00- 4.50- Use the line drawing tool to draw the market demand curve (DMarket) for the fireworks display. Properly label this line. 4.00- DMadison DHayden 3.50- Carefully follow the instructions above, and only draw the required objects. 3.00- 2.50- P 2.00- 1.50- 1.00- 0.50- 0.00- 2 4 6 8 10 12 14 16 Quantity (number of fireworks) Price (dollars per firework)

None

The fundamental problem of welfare economics is to determine at which feasible allocation the economy should operate. Discuss the challenges of aggregating individual preferences into social preferences in order to identify the socially optimal allocation.

Suppose there are two consumers A and B, and two goods x and y. A's utility function has the following form UA = XA - (XB)1. Which of the following is true? Consumer A's consumption of good x exhibits a negative externality. Consumer A's consumption of good x exhibits a positive externality. Consumer B's consumption of good x exhibits a negative externality. Consumer B's consumption of good x exhibits a positive externality.

Consider the model of a rational consumer that cares about consumption of private goods and consumption of broadcast public television (a public good). Suppose that the total level of broadcast public television provided through voluntary contributions is 10 hours of programming. Then the government decides to raise money through a tax and provide 10 hours of programming to the public. What would we predict about crowd-out of voluntary contributions to broadcast public television when government does this? How would the answer change if consumers get warm glow utility from donating to broadcast public television in addition to utility from the public television itself? (Be specific.)