Quantity (mowings per month) Price (private marginal benefit) Private Marginal C
ID: 1119231 • Letter: Q
Question
Quantity (mowings per month)
Price (private marginal benefit)
Private Marginal Cost
External Marginal Cost
0
80
—
—
1
70
30
10
2
60
30
10
3
50
30
10
4
40
30
10
5
30
30
10
6
20
30
10
(Table 17.4) Answer the following questions.
a.
How many times will a self-interested person cut her lawn during the month?
b.
What is the socially optimal number of times to mow the lawn?
c.
How might lawn cutting generate positive externalities?
d.
Besides carrying external marginal costs, suppose that lawn cutting also generates an external marginal benefit of $10. What now is the socially optimal number of times that a lawn should be cut?
Quantity (mowings per month)
Price (private marginal benefit)
Private Marginal Cost
External Marginal Cost
0
80
—
—
1
70
30
10
2
60
30
10
3
50
30
10
4
40
30
10
5
30
30
10
6
20
30
10
Explanation / Answer
(a)
A self-interested person would cut her lawn during the month that many times corresponding to which price (private marginal benefit) equals private marginal cost.
Price equals private marginal cost corresponding to 5 mowings per month.
So, a self-interested person will cut her lawn 5 times during the month.
(b)
Following is the required table -
Price
(Private marginal benefit)
Social marginal cost
(PMC+EMC)
The socially optimal number of times to mow the lawn is the number of times corresponding to which price (private marginal benefit) equals Social marginal cost.
Price equals SMC corresponding to 4 mowings per month.
So, the socially optimal number of times to mow the lawn is 4 mowings per month.
(c)
Lawn cutting generate positive externality in the sense that it enhances the appearence of neighbourhood.
(d)
Price
(Private marginal benefit)
Social marginal cost
(PMC+EMC)
Social Marginal Benefit
(PMB+EMB)
The socially optimal number of times to mow the lawn is the number of times corresponding to which Social marginal benefits equals Social marginal cost.
SMB equals SMC corresponding to 5 mowings per month.
So, the socially optimal number of times that a lawn should be cut now is 5 times per month.
QuantityPrice
(Private marginal benefit)
Private marginal cost External marginal costSocial marginal cost
(PMC+EMC)
0 80 - - - 1 70 30 10 40 2 60 30 10 40 3 50 30 10 40 4 40 30 10 40 5 30 30 10 40 6 20 30 10 40