Assignment: Externalities and Public Goods

1. Externalities:

a. Think of an example of a market with positive externalities that isn't one of the ones we talked about in class and explain why it is an externality (who is being positively affected and how)

b. Think of an example of a market with negative externalities that isn't one of the ones we talked about in class. (who is being negatively affected and how)

c. State the Coase Theorem and explain what it means for markets with externalities.

2. Externalities and Surplus: The market demand curve for wind chimes is P = 250 - 5Qd. The supply curve is P=5Qs. My neighbor's wind chimes keep me up at night when it's windy outside (always), and create a negative externality for me. Suppose this NEGATIVE demand externality is equal to $200 for the wind chimes.

a) What is the market equilibrium price and quantity (when the externality is NOT taken into account)?

b) Consider the case when the externality is taken into account. What is the socially optimal equilibrium price and quantity when this externality is included?

c) Give some intuition in regular words (not econ-speak) to explain any difference in quantity you found between the equilibrium in (a) and in (b).

3. Read the articles about the case of firefighters in Tennessee who allowed a house to burn ("No Pay, no Spray" and "The Perils of Privatizing Government" By Karen Aho). Discuss the problem faced by suppliers in the market for fire protection, and whether it qualifies as a public good or not. Pick one of the other markets discussed in the second article and discuss whether you think it is a market with a public goods problem, and if the private market will be able to achieve a socially optimal or efficient equilibrium or not.

4. Listen to the mp3 of an episode of the NPR show "This American Life":

(It's about 50 min long, so plan ahead). Explain the issue at hand here and a few of the key details - how do patents relate to our discussions of property rights, externalities, public good, etc? Why are "ideas" different than slices of pizza or pairs of shoes, from a market standpoint? Do you think patents are good, bad, good sometimes? Tell me your thoughts based on what we've learned so far.