Part A, Problem Number 1
An ‘Externality’ is a term that is used in economics to refer to the benefit or cost of a particular product that affects a third party who did not make a choice to incur that particular benefit or cost. As such, an ‘Externality’ can be either positive or negative depending on whether a benefit or a cost is acquired. Applying this concept of economics in discussing the difference between two main anti-theft devices for cars, it is clear that using the club to protect a car from theft would convey a negative externality on other car owners while using the LoJack as an anti-theft device would convey an exceptional positive externality. This is because the LoJack is a hidden device and it would not be possible for thieves to know which cars have installed it and which ones have not, thus reducing theft in general.
Meanwhile, the Club is a tool that is visible and large, not ignoring the fact that it has a neon pink color. By using it on a car, the car owner is plainly telling a prospective thief that it would be difficult to steal his or her car. The implied signal, in the meantime, is that a neighbor’s car, which has no Club, would be a lot better and easier to steal. In light of this argument, therefore, it is evident that the use of the Club as an anti-theft device on one car conveys a negative externality to other car owners who happen to be neighbors to this individual and are not using the Club. This is essential because their cars would be at a higher risk of being stolen; as a consequence, using the Club is of ideal use in serving individual interests. There are policy implications of this analysis because it would imply that the use of the Club as an anti-theft device would be limited to neighborhoods where all car owners use the same device to minimize the effects of negative externalities.
Part A, Problem Number 8
The externality in the case of Ringo and Luciano is the music or noise. The landlord would decide to limit the total amount of music that is played and the time when it is played. Consequently, an inefficient outcome would be realized because both Ringo and Luciano would be losing. Suppose the landlord lets the tenants do what they want, Coase theorem would demand that they both find equal time durations when every one of them can play his/her own music and possibly alternate or seize turns in playing them. However, if the landlord regulates them, they would be prevented from reaching an equilibrium of operation.
Part B, Problem Number 3
Economists would refer to Charlie as a ‘Free Rider’ because of his behavior. The government can resolve this problem by privatizing channels such that viewers would have to pay subscription fees in order to view or watch them, or alternatively sponsor the station and pay for its services using taxpayers’ money. The private market can resolve this issue by imposing taxes on such citizens. The presence of cable TV changes everything in such a circumstance because individuals have to pay for cables. In fact, this makes the goods from a TV station excludable, and as a result, they seize to be public goods.
Part B, Problem Number 7
When a particular individual decides to litter anywhere along the highway, other members of the society of the neighborhood would bear the effect of a negative externality, as a result, the individual or private costs incurred would below. Littering one’s own yard directly imposes a cost on the individual; consequently, a higher and larger private or individual cost is incurred making such occurrences rare.
Mankiw, Gregory N. Principles of microeconomics. 6th ed. Stamford, Connecticut: Cengage Learning, 2014. Print.