26 A negative externality is present on a market leading social marginal cost, S

Question

26 A negative externality is present on a market leading social marginal cost, S C o exceed marginal cost MC(O as perceived by producers, which is alsothe supply curve in this competitive market. Inverse demand in the market is PO). The optimal corrective tax should be set to the difference between a. price and marginal cost at the competitive quantity. b. price and social marginal cost at the competitive quantity. c. price and marginal cost at the socially optimal quantity. d. marginal social cost and marginal cost at the socially optimal quantity 27. Bargaining costs are generally high in cases involving enyironmental externalities because: a. there are strong incentives to be a free rider.. b. many individuals may be affected by the externalities. c. it is difficult to measure the costs of the externalities. d. all of the above. if: 28. Externalities between two firms can be "internalized" L. The two firms merge. II. Bargaining costs are zero. III. The externalities affect each firm equally. IV. Marginal costs for both firms are constant. Which statement(s) correctly complete the sentence? a. Only II b. All except III c. I and II, but not III and IV d. I and IV, but not II and III

Explanation / Answer

Ans 26. d) marginal social cost and the marginal cost at the socially optimal quantity.

In case of negative externalities prices should be fixed such that the consumers also pay the social marginal cost, it will increase the prices of the good and consumption would decrease.

Ans 27. d) All of the above

Bargaining costs in case of environmental concern is very high and dissicult to measure. Externalities are faced by everyone and the extent of the damage is difficult to measure.

Ans 28. d) I and IV, not II and III

Externalities between two firms can be internalized if both the firms merge. It will make the externality internal costs. Also if the marginal cost of both the firms are equal it will eliminate the externality by setting off.

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