Summary 487c. Analyst C is worried about the pollution externality and, therefore,
recommends a tax of 100 per unit of pulp output (on the currently
monopolized industry). What quantity of pulp will the monopolized
industry produce under the tax?
d. Which of the analysts’ recommendations would you support? Do you
have a better policy? Explain. (Hint:Identify the socially efficient level
of pulp production to help clarify your answer.)- 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 e-mail spam has grown exponentially in the last 5 years.
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 snow tires. 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 .25Q^2. Consequently,
the marginal cost of an extra studded tire on the road is given by
MC .5Q. Accounting for this road damage, a regulator seeks to
determine the quantity of tires that will maximize net social benefit.
Find this quantity. 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. 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.
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