Macroeconomics: Principles, Problems, & Policies
20th Edition
ISBN: 9780077660772
Author: Campbell R. McConnell, Stanley L. Brue, Sean Masaki Flynn Dr.
Publisher: McGraw-Hill Education
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Chapter 4, Problem 5DQ
To determine
The impact of subsidy and tax spill over effect.
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Why are spillover costs and spillover benefits also called negative and positive externalities? Show graphically how a tax can correct for a negative externality and how a subsidy to producers can correct for a positive externality. How does a subsidy to consumers differ from a subsidy to producers in correcting for a positive externality?
Does it make sense that accounting for the negative externality results in a higher price? Explain your answer.
Does it make sense that accounting for the negative externality results in a lower quantity? Explain your answer.
Give an example of an externality.
Explain how a tax or subsidy might be used to “correct” for the inefficiency of a market equilibrium in the presence of an externality.
Chapter 4 Solutions
Macroeconomics: Principles, Problems, & Policies
Ch. 4.A - Prob. 1ADQCh. 4.A - Prob. 2ADQCh. 4.A - Prob. 3ADQCh. 4.A - Prob. 1ARQCh. 4.A - Prob. 2ARQCh. 4.A - Prob. 3ARQCh. 4.A - Prob. 1APCh. 4 - Prob. 1DQCh. 4 - Prob. 2DQCh. 4 - Prob. 3DQ
Ch. 4 - Prob. 4DQCh. 4 - Prob. 5DQCh. 4 - Prob. 6DQCh. 4 - Prob. 7DQCh. 4 - Prob. 8DQCh. 4 - Prob. 9DQCh. 4 - Prob. 1RQCh. 4 - Prob. 2RQCh. 4 - Prob. 3RQCh. 4 - Prob. 4RQCh. 4 - Prob. 5RQCh. 4 - Prob. 6RQCh. 4 - Use marginal cost/marginal benefit analysis to...Ch. 4 - Prob. 1PCh. 4 - Prob. 2PCh. 4 - Prob. 3PCh. 4 - Prob. 4PCh. 4 - Prob. 5PCh. 4 - Prob. 6PCh. 4 - Prob. 7P
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- Explain a positive and negative externality that you have recently consumed. Please relate your answer to the characteristics of elasticity. Why does the government have to get involved when an externality is present in the market?arrow_forwardOn a generic supply-demand graph, show the deadweight loss ( DWL) of a price ceiling that is placed below the equilibrium price for a product ( you should assume that there are NO externalities associated with the product).arrow_forwardAn externality arises when a firm or person engages in an activity that affects the wellbeing of a third party, yet neither pays nor receives any compensation for that effect. If the impact on the third party is beneficial, it is called a externality. The following graph shows the demand and supply curves for a good with this type of externality. The dashed drop lines on the graph reflect the market equilibrium price and quantity for this good. Adjust one or both of the curves to reflect the presence of the externality. If the social cost of producing the good is not equal to the private cost, then you should drag the supply curve to reflect the social costs of producing the good; similarly, if the social value of producing the good is not equal to the private value, then you should drag the demand curve to reflect the social value of consuming the good. (?) PRICE (Dollars per unit) QUANTITY (Units) Supply Demand ¦ þ Demand Supplyarrow_forward
- True or False? In the presence of a positive externality, a Pigouvian subsidy results in less consumption or production of the good that generates that externality.arrow_forwardSuppose demand is QD =12 - P supply is QS = 2P. There is a constant positive externality of $6 per unit (Marginal External Benefit, MEB = $6). What subsidy would achieve the efficient allocation? In other words, what subsidy would maximize social surplus? (Do not overthink this one.) Find quantity given this subsidy. What is the social benefit that accrues due to the quantity in the previous part? (Hint: It is MEB times the quantity.) Find (private) producer surplus given this subsidy. Find (private) consumer surplus given this subsidy. How much would this subsidy cost the government? In other words, find government “revenue” (which will end up being a negative number). Add up the answers to the previous four questions to find social surplus. (It should be the same as the area between MSB and MSC.)arrow_forwardIdentify at least one positive externality from running a donut shop. Identify at least one negative externality from running a donut shop. Explain how these positive and negative externalities could impact the donut shop’s profits. (Hint: think subsidy for positive externality and tax for negative externality.) Draw two graphs that show the price of donuts before and after the positive and negative externality impacted the price of your donuts.arrow_forward
- The local government has decided that because children's health has large external benefits, it will offer a subsidy to help families pay for visits to the pediatrician. However, the government isn't sure at what level to set the subsidy. The figure below shows the current demand curve for pediatricians' visits (D1), and three alternative subsidies, represented by curves D2, D3 and D4. a. Assume that the correct level of subsidy is D3. Compared to the efficient outcome, graph the loss in total surplus that would result from subsidies D2 and D4. b. The socially optimal level of pediatrician visits is __ visits.arrow_forwardAn externality arises when a firm or person engages in an activity that affects the wellbeing of a third party, yet neither pays nor receives any compensation for that effect. If the impact on the third party is adverse, it is called a externality. The following graph shows the demand and supply curves for a good with this type of externality. The dashed drop lines on the graph reflect the market equilibrium price and quantity for this good. Adjust one or both of the curves to refiect the presence of the externality. If the social cost of producing the good is not equal to the private cost, then you should drag the supply curve to reflect the social costs of producing the good; similarly, if the social value of producing the good is not equal to the private value, then you should drag the demand curve to reflect the social value of consuming the good. -O- Supply Demand Supply Demand QUANTITY (Unts) With this type of externality, in the absence of government intervention, the market…arrow_forwardCompared to a good with no externalities, a good with a negative externality appear to have experienced a will at each corresponding price. OIncrease in Supply ODecrease in Supply OIncrease in Demand ODecrease in Demandarrow_forward
- Price MCS $5 per unit MC P B cID H Quantity QE Negative Externality The following questions refer to the accompanying diagram, which shows the effects of a negative externality created by an industry's production. Refer to the graph. According to a Pigovian analysis of this externality, when a tax of $5 per unit is imposed on the firms in this industry, the external costs created by the firms' production will equal area C + D + E + G + H. ) area C + D + G + H. area C+ G. zero.arrow_forwardAssume there is a positive externality associated with having a tertiary education. Is the deadweight loss from the subsidy increased or decreased with the introduction of the positive externality? Why?arrow_forwardThe demand and supply of ethanol are given by QD = 8,000 – 2,000P and QS = 1,000P – 1,000, where P is price per gallon and Q measures gallons per minute. Suppose the government subsidizes ethanol at $0.30 a gallon that the producer pays. What does the subsidy cost the government? After the subsidy, what is the producer surplus? After the subsidy, what is the consumer surplus? After the subsidy, what is the deadweight loss?arrow_forward
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