Temple University
Department of Economics

Economics 52

Externalities Homework

Name

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  Quantity

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

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

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

b.  Is it socially optimal for your neighbor to keep the bees?  Yes No

c.      If your neighbor consults with you, will she decide to keep the bees? That is, will you and she agree on a compensation scheme if she keeps the apiary in business?Yes

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