Question

Worksheet 3 Macroeconomics Ch. 5 Market Failures 1. Externalities. A study finds that leaf blowers make too much noise, so the government imposes a $10 tax on the same of every unit to correct for the social cost of the noise pollution. The tax completely internalizes the externality. Before the corrective tax, Blown Away Manufacturing regularly sold blowers for $100. After the tax is in place, the consumer price for leaf blowers is $105. a. Describe the impact of the tax on the number of leaf blowers sold. b. What is the socially optimal price to the consumer? c. What is the private market price? d. What net price is Blown Away receiving after it pays the tax? 2. Many cities have noise ordinances that impose especially harsh fines and penalties for early morning and late-evening disturbances. Explain why this is the case. 3. Indicate whether the following activities create a positive or negative externality: a. Late-night road construction begins on a new bridge. As a consequence, traffic is rerouted past your house while the construction takes place. b. You receive the measles vaccine. c. An excavating company pollutes a local stream with acid rock. d. You and your friends clean up trash along a 2-mile stretch on the highway. e. The benefit your neighbor receives from hearing you play the trumpet. f. They annoyance of your neighbor because she doesn't like your achingly conventional music. 4. Explain why the following are public goods: a. Tornado siren b. a radio broadcast signal c. the stability of the currency provided by a central bank such as the Federal Reserve System 5. Explain why the following are not public goods: a. a college education at a state university b. Yellowstone National Park, and, c. the services of your local fire department 6. Why are public goods sometimes difficult for markets to allocate efficiently? 7. Read the following article, "Lojack: A Case of Positive Externalities." a. What are the two sources of positive externality? b. Other than mandating lower insurance premiums for Lojack users, what might government do to increase the use of Lockjack devices in automobiles?

Answer 1

1.a. The tax imposed by the government raises the price of leaf blowers. Taxes will increase price paid by buyers and decrease price recieved by sellers. Thus by both supply and demand forces, the equilibrium quantity that gets sold in the market decreases. Buyers paying higher price demand less while sellers recieving a lower price supply less. Thus number of leaf blowers sold decreases.

b. The socially optimal price to the buyers will be that price which internalizes the externality. The tax imposed internalizes the externality completely. So after tax, consumer price is the socially optimal price for buyers, it is equal to $105.

c. The private market price is the price of the leafblower in a unregulated market. It is given that before tax imposition, regular price charged by $100. Hence private market price is $100.

d. Cosumers are paying a higher price of $105. The tax imposed is equal to the difference in the price paid by buyers and the price recieved by sellers. So price recieved by seller is price paid by buyer minus the tax. So price recieved by Blown Away is $105-$10 = $95.