Page 821 - Krugmans Economics for AP Text Book_Neat

Section 14 Summary

b.Some argue that open-source software serves an unsatisfied of air pollution, which the town wants to reduce to 200
market demand that proprietary software ignores. Draw a units. The accompanying table shows the current pollution
typical diagram that illustrates how proprietary software level produced by each company and each company’s
may be underproduced. Put the price and marginal cost of marginal cost of reducing its pollution. The marginal cost
software on the vertical axis and the quantity of software on is constant.
the horizontal axis. Draw a typical demand curve and a
marginal cost curve (MC) that is always equal to zero. As-
sume that the software company charges a positive price, P, Marginal cost of
Initial pollution reducing pollution
for the software. Label the equilibrium point and the effi-
Companies level (units) (per unit)
cient point.
College Cleaners 230 $5
18. In developing a vaccine for the H1N1 virus, a pharmaceutical
company incurs a very high fixed cost. The marginal cost of Big Green Cleaners 120 2
delivering the vaccine to patients, however, is negligible (con-
sider it to be equal to zero). The pharmaceutical company
holds the exclusive patent to the vaccine. You are a regulator a. Suppose that Collegetown passes an environmental
who must decide what price the pharmaceutical company is standards law that limits each company to 100 units
allowed to charge. of pollution. What would be the total cost to the two
companies of each reducing its pollution emissions to
a. Draw a diagram that shows the price for the vaccine that
100 units?
would arise if the company is unregulated, and label it P M .
What is the efficient price for the vaccine? Show the dead- Suppose instead that Collegetown issues 100 pollution vouch-
weight loss that arises from the price P M . ers to each company, each entitling the company to one unit of
b.On another diagram, show the lowest price that the regula- pollution, and that these vouchers can be traded.
tor can enforce that would still induce the pharmaceutical b.How much is each pollution voucher worth to College
company to develop the vaccine. Label it P*. Show the dead- Cleaners? to Big Green Cleaners? (That is, how much would
weight loss that arises from this price. How does it compare each company, at most, be willing to pay for one more
to the deadweight loss that arises from the price P M ? voucher?)
c. Suppose you have accurate information about the phar- c. Who will sell vouchers and who will buy them? How many
maceutical company’s fixed cost. How could you use vouchers will be traded?
price regulation of the pharmaceutical company, com- d.What is the total cost to the two companies of the pollution
bined with a subsidy to the company, to have the efficient controls under this voucher system?
quantity of the vaccine provided at the lowest cost to
the government? 22. Ronald owns a cattle farm at the source of a long river. His cat-
tle’s waste flows into the river and down many miles to where
19. According to a report from the U.S. Census Bureau, “the aver- Carla lives. Carla gets her drinking water from the river. By al-
age [lifetime] earnings of a full-time, year-round worker with a lowing his cattle’s waste to flow into the river, Ronald imposes
high school education are about $1.2 million compared with a negative externality on Carla. In each of the two following
$2.1 million for a college graduate.” This indicates that there is cases, do you think that through negotiation, Ronald and
a considerable benefit to a graduate from investing in his or Carla can find an efficient solution? What might this solution
her own education. Tuition at most state universities covers look like?
only about two-thirds to three-quarters of the cost, so the state
a. There are no telephones, and for Carla to talk to Ronald,
applies a Pigouvian subsidy to college education. If a Pigou-
she has to travel for two days on a rocky road.
vian subsidy is appropriate, is the externality created by a col-
lege education a positive or a negative externality? What does b.Carla and Ronald both have e-mail access, making it cost-
this imply about the differences between the costs and benefits less for them to communicate.
to students compared to social costs and benefits? What are 23. a. EAuction and EMarketplace are two competing Internet
some reasons for the differences? auction sites, where buyers and sellers transact goods. Each
auction site earns money by charging sellers for listing their
20. Fishing for sablefish has been so intensive that sablefish were
goods. EAuction has decided to eliminate fees for the first
threatened with extinction. After several years of banning such
transaction for sellers that are new to their site. Explain why
fishing, the government is now proposing to introduce trad-
this is likely to be a good strategy for EAuction in its compe-
able vouchers, each of which entitles its holder to a catch of a
tition with EMarketplace.
certain size. Explain how fishing generates a negative external-
ity and how the voucher scheme may overcome the inefficiency b.EMarketplace complained to the Justice Department that
created by this externality. EAuction’s practice of eliminating fees for new sellers was
anticompetitive and would lead to monopolization of the
21. The two dry-cleaning companies in Collegetown, College
Internet auction industry. Is EMarketplace correct? How
Cleaners and Big Green Cleaners, are a major source of
should the Justice Department respond?
air pollution. Together they currently produce 350 units

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