Question

Homework 3- Chapters 5, 6, 19 & 20 1) Antitrust legislation, in theory, is supposed to (decrease promo ition in the private sector Pollution is an example of g(negative, positive) externality If third parties benefit from a transaction, then (negativ positive externalities exist, and 2) y3) the price system will allocate resources (inefficiently, efficiently). 4) A free rider has an incentive (to pay hot to pay) for a publie good. 5) T F If third parties are hurt by the production of good B, and they are not compensated, then too many resources have been allocated to industry B 6) Which one of the following statements concerning externalities is true? a. If a positive externality exists for good A, then A will be overproduced by a price system. b. If externalities exist, then resources will be allocated efficiently. c. Efficiency may be improved if the government taxes goods for which a positive externality exists. d. The output of goods for which a positive externality exists is too low, from society's point of view. 7) Consider the graph below, then answer the questions. Assume S represents industry supply or private cost curve and and S' includes pollution costs to society as well as industry private costs. Price of Paper (S) Quantity of Paper per year Q1 Q2

Answer 1

1) Antitrust legislation was made to promote fair competition in the private sector to benefit the consumers.

2) Pollutions is an example of negative externalities as it creates harm for others without compensating them.

3) If the third parties benefit a transaction then positive externalities exists and the price system will allocate resources inefficiently as these effects are not quantitative in nature.

4) Afree rider has an incentive has an incentive not to pay for a public good as these goods have the characteristics of being non excludable.

5) True as the private optimum differs from the social optimum.

6) option d is true. In this case the private individuals produces less than the social optimum as he doesn’t takes into account the marginal benefit to others.