Week6 Part2 Solutions

[Part 10]
Question 1
1. For each of the following, identify and describe both a possible negative externality and a
possible positive externality.
a. You decide to build a chicken coop in your suburban backyard.
b. You get sick and go to a doctor. The doctor diagnoses you with a bacterial infection and
prescribes you an antibiotic.
c. An urban farmer installs a bee hive to help pollinate their rooftop gardens.
Solution 1
1.
a. Negative externality: The chicken coop will cause noise, smell, and may be unsightly to
neighbors. Positive externality: Chickens will eat pests such as mosquitoes and flies that could
benefit your neighbors.
b. Negative externality: Taking antibiotics increases the chance of cultivating antibiotic-resistant

bacteria, which can then spread to others. Positive externality: If the antibiotic makes you better,
then people around you are less likely to contract the same bacteria that made you sick.
c. Negative externality: Bees! Neighbors might not be too happy with that. What if someone in
the building has a severe allergy to bee stings? Positive externality: Others’ flowers, gardens, and
plants will benefit from having a beehive nearby.
Question 2
A local school administrator observes an increase in the number of flu outbreaks in the public
schools over the last two years. She is concerned that this is putting other children at risk, so she
proposes that the state should subsidize flu shots in order to increase coverage rates.
a. Are the administrator’s concerns valid—are too few children getting flu shots—and will a
subsidy lead to a more socially optimal quantity? Draw a graph to help analyze this policy.
b. The school nurse suggests publishing a list of which kids did not get a flu shot, in the hope that
public shaming will lead people to vaccinate their children. Is this strategy likely to work? Why
or why not?
Solution
a.
Yes, the administrator’s concern is valid from an efficiency perspective. Too few flu shots led to
a higher number of flu episodes. An inefficiently low number of individuals will be vaccinated in
this market because the external benefit to others will not be taken into account during the
decision-making process. It is likely that the proposed policy will help; a subsidy will reduce the
cost to the individual, and as a result, more individuals will find it beneficial to get vaccinated
even though they are still only considering their private benefits. They will act as though they are
incorporating the positive externality into their decision. Ultimately, whether a socially efficient
outcome will be achieved depends on whether the subsidy is set properly—the administrator
must be certain of the marginal external benefit to properly set the subsidy.
b. The strategy may work. Norms and social sanctions act like corrective taxes. Publishing the
list of names may be enough to incentivize some of the remaining parents to get their kids a flu
shot. An alternative or additional solution to counter the underprovision of flu shots might be to
use positive social recognition as a corrective subsidy. For example, the text discusses adults
receiving an “I voted” sticker and posting a selfie on social media. The administrator could
implement something similar, such as a sticker or a party as a reward for those who received the
shot.
Problem 1
For each of the following, identify whether it is nonexcludable, nonrival, neither, or both and
briefly explain your answer. Additionally, determine which would suffer from the free-rider
problem.
a. A national forest with dozens of access points for hiking trails located along public roads and
highways.
b. Yellowstone National Park.
c. National defense.
d. A subway train.
Solution
a. Nonexcludable. Even if the forest service wanted to limit entry by requiring a permit or user
fee to get in, the large number of easily accessible access public points would make it very costly
and not reasonably possible to enforce. The national forest is rival, however. When too many
people access it, the trails can become crowded, and too many hikers can damage the trails.
Since the trail use is rival, it does not suffer from the free-rider problem.
b. Neither. Unlike many national forests, Yellowstone National Park has well-defined and
monitored entrances, requires an admission fee, and individuals who do not pay the fee are
excluded. It is also rival in consumption since there are many people trying to drive through the
park at the same time and the park itself can become congested. Since the park is rival and
excludable, it doesn’t suffer from the free-rider problem.
c. Both. It is nearly impossible to provide defense for some individuals and not others in the
same region, so defense is nonexcludable. Providing defense for one individual does not prevent
others in the region from also benefiting, so defense is nonrival. Since defense is both
nonexcludable and nonrival, it suffers from the free rider problem.
d. Neither. A subway ride requires a ticket, so it is excludable to those who don’t pay. The
subway can also become congested with a limited number of available seats, so it is rival. Since
the subway is neither nonrival nor nonexcludable, it doesn’t suffer from the free-rider problem.
Problem 2
For centuries, Alaskans relied on salmon and other freshwater fish for protein, oil, and other
nutrients. But when jetliners began flying tourists who love fishing from Seattle to Anchorage in
the 1950s, the stock of Alaskan salmon began falling. Following the advice of environmental
scientists and economists, the Department of Fish and Game introduced restrictions on the
minimum size (28 inches) and the number of salmon caught (5 per day). Among their concerns
was the high fraction of young salmon caught before they could reproduce.
a. Are Alaskan salmon a private good, public good, or a common resource?
b. How does the equilibrium quantity in the market compare to the socially optimal quantity of
fish caught? Draw a graph.
c. What are two government policy interventions which could deal with this market failure?
Solution
a. Alaskan salmon are a common resource: rival but nonexcludable.
b. The equilibrium market quantity is greater than the socially optimal quantity of fish caught.
The tourists don’t take into account the external cost of their actions, creating a negative
externality. The salmon are overconsumed.
c. As mentioned in the question, one government policy is to implement a quota limiting the
number of salmon caught. Another potential solution is to charge a tax or fee for each catch
equal to the marginal external cost, inducing the tourists to internalize the externality caused by
overfishing.

Week6 Part2 Solutions

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[Part 10]

a. You decide to build a chicken coop in your suburban backyard.

b. Negative externality: Taking antibiotics increases the chance of cultivating antibiotic-resistant

b. Yellowstone National Park.

a. Alaskan salmon are a common resource: rival but nonexcludable.

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