Suppose Coca-Cola and Pepsi announced plans to merge into a single global soft-drink company. What would be the possible effects on soft- drink consumers of such a union? What kind of regulatory scrutiny should the U.S. government cast on the proposed merger?

In each of the following situations, explain whether an externality is present.

a. Mine safety has improved in recent years. Nonetheless, mining accidents result in 50 to 100 deaths per year and thousands of lost workdays due to injury.

b. Large brokerage and financial service companies conduct intensive introductory training programs for new hires, many of whom, once trained, leave the company within the first year to work for competitors.

c. The volume of email spam has grown exponentially in the last five years. (One proposed remedy is to require a sender's computer to solve a 5-second problem every time it sends an email.)

d. A husband and wife who have put off buying a house suddenly find themselves priced out of the market by rocketing real-estate prices. Consider the market for studded tires used to fight hazardous road conditions during the winter months. Industry demand is given by P 170 5Q, where Q is the number of tires in thousands, and P is the price per tire in dollars. Studded tires are supplied in a competitive market at an average cost of $60 per tire.

a. Determine the competitive price and quantity of studded tires.

b. Over their lifetimes, studded tires cause considerable road damage. The best estimate of total road damage is C = .250. Consequently, the marginal cost of an extra studded tire on the road is given by MC 5Q, The MC per tire increases the greater the number of tires grinding down the road. Accounting for this road damage, a regulator seeks to determine the quantity of tires that will maximize net social benefit. Find this quantity. (Hint: Find the quantity at which the competitive price equals the full cost of an extra tire.) At this quantity, what is the resulting market price? Compute the net social benefit.

c. By what regulatory means could this outcome be obtained? Explain.

d. Suppose firms can manufacture low-impact studded tires that do negligible road damage at an extra cost of $12 per tire. Assuming optimal regulation (as in part b or part c), which type of tire will be produced? Explain. Explain whether you agree or disagree with each of the following statements concerning the role of government. In each case, indicate whether your position is based (implicitly or explicitly) on benefit-cost analysis or on some other criterion.

a. The Consumer Product Safety Commission should uphold strict safety standards for all children's toys.

b. OSHA should relax many of its workplace safety regulations, for instance, by relying on workers to take precautions rather than requiring expensive safety devices on machines and tools.

c. Mass transit, all public buildings, and all institutions receiving federal funds must be modified where necessary to ensure access for disabled individuals.

d. The Department of Agriculture should curtail the use of pesticides by farmers.

e. Given its large projected deficit, the federal government should postpone capital spending to repair 100-year-old bridges.