Temple University
Department of Economics

Externalities and Efficiency

Name

On a sunny day it is possible to rent a bicycle from one of the many rental firms in the city for use on the walkways along Boathouse Row in Fairmount Park.  The market for such rental is described by the following pair of equations:

P = 5 + 0.1 Q

P = 20 - 0.2 Q

1. In the boxes to the right of the equations indicate which is the supply curve and which is the demand curve for rentals.

2. What are the equilibrium price and quantity for bicycle rentals?

Price =    Quantity =

3. At the equilibrium what is apparent consumer surplus?

4. At the equilibrium what is apparent producer surplus?

5. What is the amount of apparent total economic surplus?

6. It is now recognized that the walkways are used by pedestrians as well as cyclists.  People on foot must maintain a constant vigil for maniacal cyclists on sunny days.  This vigilance is a negative externality and imposes a cost on pedestrians of \$3 per cyclist.  What price and quantity are socially optimal when the cost of the externality is recognized?

Price = Quantity =

7. What is the marginal social cost of the last bicycle rental at the quantity you found in your answer to question 2?

8. What is the private marginal cost of the last bicycle rental at the quantity you found in your answer to question 2?

9.  What is the deadweight loss resulting from the negative externality imposed by cyclists on those on foot?

10. How large a tax on bicycle rentals would be necessary to correct the problem of the externality?

11. After the tax what number of bicycles will be rented?

12. After the tax what is the price of a rental to the consumer?

13. Net of the tax, what is the price received by bicycle rental companies?

14. How much tax revenue is collected?

15. When the externality tax is imposed what is the amount of consumer surplus?

16. When the externality tax is imposed what is the amount of producer surplus?

17. What is the amount of total economic surplus when there is an externality tax?

18. The tax revenue collected represents (check all that apply):
the cost of the externality to cyclists
the cost of the externality to pedestrians
the cost of the externality to bicycle rental companies
the cost of the externality to the local government