1.5. In the following cases, the markets are in equilibrium, but there are externalities. In each case, determine whether there is an external benefit or cost and estimate its size. Finally, decide between a tax or a subsidy as a simple way to compensate for the externality. Fill out the table below with your answers.

a. In the market for automobiles, the private benefit of one more small SUV is $20,000 and the social cost of one more small SUV is

$30,000.

b. In the market for fashionable clothes, the mar ginal social benefit of one more dress per per son is $100, and the marginal private benefit is

$500. Bonus: Can you tell an externality story that makes sense of these numbers?

c. In the market for really good ideas, ideas that will dramatically change the world for the better, the private benefit of one more really good idea (from speaker's fees, book sales, patents, etc.) is $1,000,000. The mar ginal social benefit is $100,000,000.

External Cost or Benefit?

b. Fashionable clothes

c. Ideas the right to a pleasant-smelling environ ment. Does this mean that the factory will be required to stop producing the bad smell?

What could happen instead? There are many right answers. (Hint: Think about the Coase theorem. Actually, it's always a good idea to think about the Coase theorem, whether the topic is smelly factories, labor-management Size of External Benefit (or Cost if Negative)

Tax It or Subsidize It?