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Question 03: Externalities - both negative and positive! Question 04: Private solutions to an externality using the Coase Theorem: Part A - below are the private market supply Part B - below are the private market supply Sally and Jim are on an oversea airline flight for 8 hours. If reclining her seat is worth $20 to Sally, but ('000) and demand curves for the poultry ('000) and demand curves for the tree industry. for Jim, in the seat behind Sally, being able to put his laptop on the tray table is only worth $10 to industry. Chicken production involves a lot of Planting trees benefits the environmental and him, then... environmental damage to nearby land and helps control the climate. It is estimated the water. It is estimated the social cost is $15 per social benefit above and beyond any private How could they work things out between themselves if there is no clear "right" either to recline 1000 chickens. benefit is $15 per 1000 trees. one's seat or to have your tray table down? 1) What would be the right size tax to place on 6) What would be the right size subsidy to place chickens to correct this market failure? on trees to correct this market failure? 2) Draw in a new supply curve if we take into 7) Draw in a new demand curve if we take into account the social costs along with the private account the social benefit along with the What if Sally is guaranteed the "right" from the airline to recline her seat - would Sally and Jim costs (this is the same as adding the tax!) private benefit individual consumers would even have to agree on anything? 3) What is the socially optimal price and quantity? have . 4) The private market without the tax would 3) What is the socially optimal price and quantity? produce too [ many OR few ] chickens. The private market without the subsidy would 5) There is a deadweight loss when the private produce too [ many OR few ] trees. What if Jim is guaranteed the "right" to flip down his tray - could Sally and Jim come to an market is not producing at the socially optimal 10) There is a deadweight loss when the private agreement without the government, I mean airline, getting involved? How? quantity. Calculate this amount and shade the market is not producing at the socially optimal area representing this efficiency loss. quantity. Calculate this amount and shade the area representing this efficiency loss. P $50 - $50 . What if Jim is guaranteed the "right" to flip down his tray. But there's a lawyer setting next to lim, how might this make it harder to reach an agreement? Look back to the conditions the Coase Theorem requires. 40 40 30 30 20 What if Sally instead wanted to play music within hearing range of half a dozen nearby passengers 20 - why might it be harder to reach some agreement in this case? Look back to the conditions the Coase Theorem requires 10 10 10 20 30 10 20 30 Question 05: A few multiple-choice questions for practice: Deadweight Loss due to Externalities: "Quantity levels less than or greater than the efficient quantity create efficiency losses (or deadweight losses)." 1. An externality, whether positive or negative, is the impact of "Our analysis of the efficiency loss of a tax assumes no negative externalities .... Where such spillover costs a) society's decisions on the well-being of society. occur, the excise tax on the producers might actually improve allocation efficiency by reducing output and thus b) a person's actions on that person's well-being. lessening the negative externality." - Mcconnell, Brue, Flynn, 18e, p. 129 & 368 c) one person's actions on the well-being of a bystander. d) society's decisions on the poorest person in the society