For question (2), answer two of the options below:

a) Define externality, and briefly discuss examples of a positive and negative externality.

b) Briefly compare command-and control environmental regulation to a pollution charge. Does a pollution charge have any advantages over command-and-control? Elucidate.

c) Education provides both private benefits to those who receive it and broader social benefits for the economy as a whole. Government policies address the issue of positive spillovers in technology. Suggest a parallel set of policies that governments could follow for addressing positive externalities in education.

d) Radio stations, tornado sirens, light houses, and street lights are all public goods in that all are nonrival and Therefore, why does the government provide tornado sirens, street lights and light houses, but not radio stations (other than PBS stations)?

3. HighFlyer Airlines wants to build new airplanes with greatly increased cabin space. This will allow HighFlyer Airlines to give passengers more comfort and sell more tickets at a higher price. However, redesigning the cabin means rethinking many other elements of the airplane as well, like the placement of engines and luggage, and the most efficient shape of the plane for moving through the air. HighFlyer Airlines has developed a list of possible methods to increase cabin space, along with estimates of how these approaches would affect costs of operating the plane and sales of airline tickets. Based on these estimates, the following table shows the value of R&D projects that provide at least a certain private rate of return.

Private Rate of Return (%)	Value of R&D (millions of $)
12	100
10	200
8	300
6	400
4	500

*If the opportunity cost of financial capital for HighFlyer Airlines is 6%, how much should the firm invest in R&D?

*Assume that the social rate of return for R&D is an additional 2% on top of the private return; that is, an R&D investment that had a 7% private return to HighFlyer Airlines would have a 9% social return. How much investment is socially optimal at the 6% interest rate?

Column 1 = Private Rate of Return.

Column 2 = Value of R&D Projects that Return at Least the Private Rate of Return to HighFlyer Airlines.