In which of the following situations would a positive externality most likely be involved?
A) Ellen is sitting at home one day when she gets a telephone call, informing her that she has won $10,000 in a contest she entered three months ago.
B) Willy needs eight hours of sleep each night to feel good. Last night he got eight hours of sleep.
C) Ronald loves the smell of freshly-baked cookies. He just moved into a new apartment that is upstairs from a bakery and his apartment smells like cookies all day long.
D) Patrick received an A on a biology exam. He is feeling better about his chances of getting admitted to medical school.
University researchers create a positive externality because what they discover in their research labs can easily be learned by others who haven't contributed to the research costs. If there are no subsidies, what is the relationship between the private equilibrium quantity of university research and the socially efficient quantity of university research produced?
A) They are equal.
B) The private equilibrium quantity is greater than the socially efficient quantity.
C) The private equilibrium quantity is less than the socially efficient quantity.
D) There is not enough information to answer the question.
Mike and Barb are both in the same enclosed hotel room. Mike assigns a $20 value to smoking his cigar. Barb values smoke-free air at $10. Which of the following scenarios is a successful example of the Coase theorem?
A) Barb offers Mike $15 not to smoke his cigar. Mike accepts and does not smoke.
B) Mike pays Barb $11 so that Mike can smoke his cigar.
C) Mike pays Barb $9 so that Mike can smoke his cigar.
D) Barb offers Mike $10 not to smoke his cigar. Mike accepts and does not smoke
In California, gasoline taxes add up to about $0.60 (60 cents) per gallon. If the only reason we have gasoline taxes is to correct for the negative externalities associated with gas consumption, then
A) the external cost of gas consumption is likely to be at least $0.60 per gallon.
B) the tax reduces consumption of gasoline closer to the socially optimal quantity.
C) the tax means that private buyers and sellers of gasoline have internalized the externality.
D) all of the above.
[Graphically illustrate the externality in the market for gasoline and show the effect of the tax on the market.]