1. What type of externality (positive or negative)is described in each ofthe fol
ID: 1244029 • Letter: 1
Question
1. What type of externality (positive or negative)is described in
each ofthe following examples? Is the marginal social benefit
of theactivity greater than or equal to the marginal benefit to
theindividual? Is the marginal social cost of the activity
greaterthan or equal to the marginal cost to the individual?
Consequently, without intervention, will there be too little or
too much(relative to what would be socially optimal) of this
activity?
a. Mrs. Chau plants lots of colorful flowers inher front yard.
b. Anna Crombie and Fritz, a popular clothingstore, opens in
a mall,attracting more shoppers who also visit other stores.
c. The fraternity next to your dorm plays loudmusic, keeping
you fromstudying.
d. Maija, who lives next to an apple orchard,decides to keep
bees toproduce honey.
e. Justine buys a large SUV that consumes a lotof gasoline.
thanks in advance for your help,
Jacqui
Explanation / Answer
(a) Mrs. Chau planting lotsof colorful flowers in her front yard is a positive externality.The marginal social benefit is greater than the marginal benefit toMrs. Chau. Therefore, without intervention, there will be toolittle of this activity. (b) Anna Crombie and Fritz opening in a mall, which attracts moreshoppers who also visit other stores is a positive externality. Themarginal social benefit is greater than the marginal benefit toAnna Crombie and Fritz. Without intervention, there will be toolittle of this activity. (c) The fraternity next to your dorm playing loud music, keepingyou from studying is a negative externality. The marginal privatecost to the fraternity is less than the marginal social cost tosociety. Without intervention, there will be too much of thisactivity (d) Maija deciding to keep bees to produce honey is a positiveexternality. The marginal social benefit is greater than themarginal benefit to Maija. Without intervention, there will be toolittle of this activity. (e) Justine buying a large SUV that consumes a lot of gasoline is anegative externality. The marginal private cost to Justine is lessthan the marginal social cost to society. Without intervention,there will be too much of this activity.
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