Question

1. The existence of externalities is due mainly to the fact that

Select Answer

a. monopolies tend to produce too little of a good anyway
b. the optimal level of pollution is zero
c. pollution is not a serious problem
d. property rights are poorly defined

2. Suppose the equation that describes demand is P=100 - Q and the MC=10 + Q. Would total welfare be greater under a competitive equilibrium or a monopoly equilibrium (in both cases firms do not consider the marginal social cost =Q)?

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a. Social welfare is greater under monopoly
b. Social welfare is greater under perfect competition

3. Suppose the equation that describes demand is P=100 - Q and the supply curve is P=10 + Q. If the external harm is an increasing function of quantity (i.e. MC=Q) then the supply curve that considers the social harm will be P=10 + 2Q. What is the difference between the competitive equilibrium quantity and the socially optimal quantity?

Select Answer

0
15
30
45

Answer 1

1> d. property rights are poorly defined

Suppose a firm is causing air pollution and people are suffering because of it, since air is owned by no-one, this is an issue of externality.

2> a. Social welfare is greater under monopoly

Since monopoly produces lesser output and due to externality, the socially optimum outcome is lesser than the private outcome, social welfare is maximum under monopoly.

3> B

At perect comp. 100-Q=10+Q So, Q=45

At social optimum 100-Q=10+2Q So, Q=90/3=30

Thus, the difference is 45-30=15