Consider two ways to protect your car from theft. The Club ( a steering wheel lo

Question

Consider two ways to protect your car from theft. The Club ( a steering wheel lock) makes it difficult for a car thief to take your car. Lojack (a tracking system) makes it easier for the police to catch the car theif who has stolen it.

1) Which causes a positive externality? (Lojack, Club, Neither, Both)

2) Which of the following needs to be subsidized? (Lojack, Club, Neither, Both)

3) Which of the following needs to be taxed? (Lojack, Club, Neither, Both)

4) Which causes a negative externality? (Lojack, Club, Neither, Both)

Explanation / Answer

1. Lojack- A positive externality is a benefit that is enjoyed by a third-party as a result of an economic transaction. Third-parties include any individual, organization, property owner, or resource that is indirectly affected. Lojack reduces the probability of theft.

2. Lojack – Government should subsidize goods with positive externalities.

3. Club - Government should tax goods with negative externalities.

4. Club - A negative externality is a cost that is suffered by a third party as a result of an economic transaction. In a transaction, the producer and consumer are the first and second parties, and third parties include any individual, organization, property owner, or resource that is indirectly affected. clubs only improve the probability that others will be robbed

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