Figure 2 Price Supply 125 $110 ….. $89 Social value Demand 58 73 94 Quantity 16.

Question

Figure 2 Price Supply 125 $110 ….. $89 Social value Demand 58 73 94 Quantity 16. Refer to Figure 2. Each additional unit of the good that is produced yields an external a. benefit of $15. b. benefit of $36. c. cost of S15. d. cost of $36. 17. Refer to Figure 2. The socially optimal quantity of output is a. 58 units. b. 73 units c. between 73 and 94 units. d. 94 units. 18. Refer to Figure 2. The social optimum can be reached if a. a subsidy of $36 is applied to each unit of the good. b. a subsidy of $23 is applied to each unit of the good. c. a tax of $23 is applied to each unit of the good d. a tax of $15 is applied to each unit of the good 19. In which of the following cases is the Coase theorem most likely to solve the externality? a. Ed is allergic to his roommate's cat. b. Chemicals from manufacturing plants in the Midwest are causing acid rain in Canada. ter runoff from farms is making residents of a nearby town sick. d. Industrialization around the world is causing global warming 20. Mary and Cathy are roommates. Mary assigns a $30 value to smoking cigarettes. Cathy values smoke-free air at $15. Which of the following scenarios is a successful example of the Coase theorem? a. Cathy offers Mary $20 not to smoke. Mary accepts and does not smoke. b. Mary pays Cathy $16 so that Mary can smoke. c. Mary pays Cathy $14 so that Mary can smoke. d. Cathy offers Mary S15 not to smoke. Mary accepts and does not smoke.

Explanation / Answer

Q16-18 are answered below

16.

Extenral benefit = 125-89 = $36

Reason: It is imposing a benefit equal to $36 since social value exeeds private value

17.

Correct option: 73 units

Reason: Socially optimal allocation occurs at the point of intersection of social value and supply curve.

18.

Correct option: a subsidy of $36 is to be applied

Reason: In case of positive externality, government needs to provide subsidy to produces equal to externality benefit imposed on society

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