AP_Krugman_Textbook

rivers and aquifers need to be pumped. The difference

between the marginal social benefit and the marginal pri-

vate benefit to individual homeowners is the marginal

external benefit. A Pigouvian subsidy for installing water-

saving toilets equal to the marginal external benefit could

bring the marginal private benefit to individual home-

owners in line with the marginal social benefit.

c.Disposing of old computer monitors imposes an external

cost: the marginal private cost to those disposing of old

computer monitors is lower than the marginal social

cost, since environmental pollution is borne by people

other than the person disposing of the monitor. The dif-

ference between the marginal social cost and the margin-

al private cost to those disposing of old computer moni-

tors is the marginal external cost. A Pigouvian tax on the

disposal of computer monitors equal to the marginal

external cost, or a system of tradable permits for their

disposal, could raise the marginal private cost to those

disposing of old computer monitors up to the level of the

marginal social cost.

Tackle the Test:

Multiple-Choice Questions

1. a


2. d


3. c


4. a


5. a
   Tackle the Test:
   Free-Response Questions


6. 
   

Module 76

Check Your Understanding

1. a.A public space is generally nonexcludable, but it may or
   may not be rival in consumption, depending on the level
   of congestion. For example, if you and I are the only
   users of a jogging path in the public park, then your use
   will not prevent my use—the path is non rival in con-
   sumption. In this case the public space is a public good.
   But the space is rival in consumption if there are many
   people trying to use the jogging path at the same time or

MSC

S

D

Negative Externality

Price,

marginal

social

cost

Quantity of plastic

water bottles

QOPT

POPT

PMSC

PMKT

QMKT

Marginal

external

cost

EMKT

O

Pigouvian

tax

the marginal social cost—an inefficient outcome. In that

case, allowing an overdue patron another day would

increase total social benefit more than it would increase

total social cost. So charging a moderate fine that reduces

the number of days that books are returned late to the

socially optimal number of days is appropriate.

Tackle the Test:

Multiple-Choice Questions

1. a


2. a


3. d


4. b


5. d

Tackle the Test:

Free-Response Questions

2. a.The marginal social cost of pollution is the additional cost
   imposed on society by an additional unit of pollution.
   b.The marginal social benefit of pollution is the additional
   benefit to society from an additional unit of pollution.
   Even when a firm could provide the same quantity of
   output without polluting as much, there is a benefit from
   polluting more because the firm can devote less money
   and resources to pollution avoidance.
   c.The socially optimal level of pollution is that level at
   which the marginal social benefit of pollution equals the
   marginal social cost.

Module 75

Check Your Understanding

1. This is a misguided argument. Allowing polluters to sell
   emissions permits makes polluters face a cost of pollut-
   ing: the opportunity cost of not being able to sell the per-
   mits that cover that pollution. If a polluter chooses not to
   reduce its emissions, it cannot sell its emissions permits.
   As a result, it forgoes the opportunity of making money
   from the sale of the permits. So, despite the fact that the
   polluter receives a monetary benefit from selling the per-
   mits, the scheme has the desired effect: to make polluters
   internalize the externality of their actions and reduce the
   total amount of pollution.


2. a.Planting trees imposes an external benefit: the marginal
   social benefit of planting trees is higher than the margin-
   al private benefit to individual tree planters because many
   people (not just those who plant the trees) can enjoy the
   improved air quality and lower summer temperatures. The
   difference between the marginal social benefit and the
   marginal private benefit to individual tree planters is the
   marginal external benefit. A Pigouvian subsidy equal to
   the marginal external benefit could be placed on each
   tree planted in urban areas in order to increase the mar-
   ginal private benefit to individual tree planters to the
   same level as the marginal social benefit.
   b.Water-saving toilets create an external benefit: the mar-
   ginal private benefit to individual homeowners from
   replacing a traditional toilet with a water-saving toilet is
   almost zero because water is very inexpensive. But the
   marginal social benefit is large because fewer critical

S-46 SOLUTIONS TO AP REVIEW QUESTIONS