Concepts and Terms
Externality
Private vs. Social costs
Pecuniary vs. Technical (or technological) externality Pigou or Pigouvian Tax (or subsidy)
Internalizing an externality Transaction Costs Property Rights
Coase Theorem
Q2 (10 points)
1. On positive externalities
a. Illustrate a positive eternality using MCprivate and MCsocial and a demand curve. Show Qopt and Qe. How can this externality be corrected?
b. Now instead show the same positive externality using and + and a curve.
c. True, False, or Uncertain (and why) there is no meaningful economic difference between representing the externality via the supply or demand side.
2. Explain the Coase Theorem.
3. Suppose I decide to build a spite fence, e.g. https://en.wikipedia.org/wiki/Spite_fence Describe how this could be resolved by a court. Could this also be resolved via a Coasian bargain? Under what circumstances would it not be able to be resolved?
4. My neighbor plants blueberries in her garden, which is up against our shared chain link fence. My cat, who is a freak, likes to eat blueberries. One day my cat makes a daring escape out the back door and goes full munchy on my neighbor’s blueberries. True, False, or Uncertain (and why), I should be required to reimburse my neighbor for the loss of her blueberries.
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