(I) The price you pay for a security system for your home

(II) The safety you enjoy as a result of having the security system

(III) The crime that is more likely to occur to your neighbour once a criminal sees a “Protected By Alarm” sticker on your window

(IV) The extra safety your neighbour might experience because criminals tend to stay away from neighbourhoods that have a lot of burglar alarms

Romance novels impose an external cost on men, who have to try to live up to these unrealistic expectations. Suppose the private cost function is given by MC = 10 + Q and the demand curve is given by MB = 50 – Q, while the external cost per novel to men is 10. The overproduced quantity is _______ and the deadweight loss is _______.

MC = 15 + 2Y

where Y is tons of wood pulp produced. In addition to this private marginal cost, an external cost is incurred. Each ton of wood pulp produces pollutant flows into the river which cause damage valued at $15. This is an external cost, as it is borne by the wider community but not by the polluting firm itself. The marginal benefit (MB) to society of each ton of produced pulp, in $, is given by

MB = 45 − Y

What’s the result of private-optimal quantity minus socially efficient quantity?

(I) Transaction costs are low

(II) Property rights are clearly defined

Statement 1: Government tax always cause deadweight losses

Statement 2: An appropriate tax on a good with external cost can reduce the quantity traded and thus reduce deadweight loss

Statement 1: Positive externalities occur when a person keeps his yard well maintained which increases the value of houses around

Statement 2: Positive externalities occur when consumers reduce their demand for textbooks and price thereby declines

Statement 1: A problem of applying Pigouvian taxes is that we can hardly know the exact level of externalities and hence the optimal tax to apply.

Statement 2: With perfect information, a Pigouvian tax would be identical to tradable allowances in effect

Determine whether the following statements are TRUE OR FALSE.

Statement 1: When external benefits are significant, market output is greater than socially efficient output quantity

Statement 2: Pigouvian subsidies can be used to solve the external cost problem

Continue from the previous question. Consider two alternative ways of allocation when shortage is present: bribery and waiting in line. Calculate the difference in total social welfare between the two cases. (Assume that the waiting costs are the same across all individuals.)