Chapter 75, Problem 2CYU

a)

To determine

Whether an external cost or an external benefit is created when trees are planted in urban areas improve air quality and lower summer temperatures and identification of an

appropriate policy response

Explanation of Solution

When trees are planted in urban areas that improve air quality and lower summer temperatures, then they impose an external benefit because the marginal

social benefit of planting trees is higher for the society as compared to an individual or private benefit to planters. Because the number of people or society as a whole can enjoy the benefit of air quality and lower temperature in hot days or summer season.

The response of the policy would be:

1. The marginal external benefit is the difference between the marginal social benefit and the marginal private benefit to the tree planter.
2. And Pigouvian subsidy would be similar to the marginal external benefit that may be for each plant that was planted in the urban area as it can increase the marginal private benefit to the tree planter in the same proportion of the marginal social benefit.

Economics Concept Introduction

Introduction: Marginal private benefit is the benefit that is obtained by an individual by using an extra unit of the product. And, marginal social benefit is the benefit which is obtained by the whole society as well as the individual by producing an extra unit of a product.

Marginal private cost is the cost that is incurred by an individual by using an extra unit of the product. And, marginal social cost is the expense which is incurred by the whole society due to the production of an extra unit of a product.

b)

To determine

Whether an external cost or an external benefit is created when water-saving toilets decrease the need to pump water from rivers and aquifers where the cost of a gallon of water to homeowners is virtually zero and identification of an appropriate policy response.

Explanation of Solution

When water-saving toilets decrease the need to pump water from rivers and aquifers where the cost of a gallon of water to homeowners is virtually zero then, these toilets create an external benefit because water is much inexpensive and by replacing the traditional toilet with water-saving toilet, the whole society get the benefit of low wastage of water.

The response of the policy would be:

1. The marginal external benefit is the difference between the marginal social benefit and the marginal private benefit to the homeowner.
2. And a Pigouvian subsidy for installation of water saving toilets would be equal to the marginal external benefit that may bring the same amount of marginal private benefit to the homeowners and the marginal social benefit to the society.

Economics Concept Introduction

Introduction: Marginal private benefit is the benefit that is obtained by an individual by using an extra unit of the product. And, marginal social benefit is the benefit which is obtained by the whole society as well as the individual by producing an extra unit of a product.

Marginal private cost is the cost that is incurred by an individual by using an extra unit of the product. And, marginal social cost is the expense which is incurred by the whole society due to the production of an extra unit of a product.

c)

To determine

Whether an external cost or an external benefit is created if old computer monitors contain toxic materials that pollute the environment when improperly disposed of and identification of an appropriate policy response.

Explanation of Solution

If old computer monitors contain toxic materials that pollute the environment when improperly disposed of then, it imposes an external cost because the marginal private cost would be lower than the marginal social cost. The environmental pollution is borne by the whole society not only by the person who is disposing off.

The response of the policy would be:

1. The marginal external benefit is the difference between the marginal social cost and the marginal private cost of the person who is disposing off.
2. And Pigouvian tax for disposing the computer monitors would be equal to the marginal external cost that may bring the same amount of marginal private cost to the person who is disposing and the marginal social cost to the society.

Economics Concept Introduction

Introduction: Marginal private benefit is the benefit that is obtained by an individual by using an extra unit of the product. And, marginal social benefit is the benefit which is obtained by the whole society as well as the individual by producing an extra unit of a product.

Marginal private cost is the cost that is incurred by an individual by using an extra unit of the product. And, marginal social cost is the expense which is incurred by the whole society due to the production of an extra unit of a product.