1. Externalities

2. If there are no externalities then, unless the supply curve is vertical, a sales tax results in excess burden. This means that the government’s revenue from the tax is less than the resulting reduction in the total of demander’s and suppliers’ profits A)True B)False

3. The government’s revenue from taxing an activity that causes negative externalities may be greater than the total cost of this tax to buyers and sellers of the good. A)True B)False

4. Travel time on a commuter route is 15+N/10 minutes where N is the number of users. To each user, the cost of an extra minute of travel time is 30 cents. 150 commuters use this route. The total cost of the externality caused by one more driver is about: A)$4.50 B)$15.00 C)$0.30 D)$30 E)$2.00

5. Why is that? Travel time for each traveler goes up by 1/10 of a minute when another user takes route. 1/10 of a minute for each of 150 commuters totals 150/10=15 minutes. At 30 cents per minute, the cost is.30x15=$4.50.

6. And on to our lecture…

7. Which is an example of a positive externality. A)Alice outbids Bob for a good in an auction. B)Bob chatters to his seatmate throughout a symphony concert. C)Alice maintains a garden which her neighbors enjoy. D)Bob buys a steak and consumes it at home.