Temple University
Department of Economics 

Economics 52

Externalities Homework

 

Name Key

1.

 Suppose the supply curve for cans of soda in your dorm is given by P = .20 + .001 Q, where P is price and Q is the number of cans sold per day.  The demand curve for cans of soda in the dorm is given by P = .80 - .002 Q.   

 a.      Find the equilibrium price and quantity of soda cans per day sold in the dorm.

Price $0.40 Quantity 200

b.     If each soda can imposes $.05 in costs on society (because they become litter or must be thrown away or recycled), what is the socially optimal number of soda cans for the dorm? Quantity

.25+.001Q = .8 - .002Q ==> Q = 183.334

c.      How could a tax on soda cans be used to assure the socially optimal number of cans are sold? The tax should be $0.05

2.     

You own an apple orchard and raise and sell apples at your own fruit stand.  The neighbor next door to your orchard is a beekeeper.  She keeps bees to make and sell honey.  This year, the neighbor is considering getting rid of her bees because her honey business loses money.  If she doesn't raise her bees, your apple production will fall without the bees to pollinate the trees.  The following payoff matrix shows the returns to you and your neighbor with and without the bees.  

  No Bees Bees
You 1000 1300
Neighbor 0 -100

 

a.      If your neighbor makes her decision without considering your orchard, will she keep the bees?  Yes  No NO

b.  Is it socially optimal for your neighbor to keep the bees?  Yes No  YES, since economic value is maximized with the bees.  Compare 1000 with 1300-100 = 1200.

c.      If your neighbor consults with you, will she decide to keep the bees? Yes  Yes

d.  How much will you pay to your neighbor to induce her to keep her bees? At least   100 but less than 300