Question

Externalities and Public Goods - End of Chapter Problem

Each of the given scenarios involves an externality. Classify each scenario based on whether or not it is likely that private bargaining could be used to achieve a socially optimal outcome in each case.
Likely Not likely
LaShawn's neighbor mows his lawn Opening an Apple store in a mall causes
during the night. overall sales in the mall to increase by 10%.
The production of steel results in
pollution that affects millions of
residents in the surrounding area.

Answer 1

Private bargaining may or may not be able to achieve a socially optimal outcome in scenarios involving externalities. In the case of LaShawn's neighbor mowing the lawn at night, it is unlikely that private bargaining can be used. However, in the scenario of opening an Apple store in a mall, private bargaining could potentially lead to a socially optimal outcome. For the production of steel causing pollution, private bargaining is unlikely to be effective and government intervention may be necessary.

Step-by-step explanation:

Private bargaining refers to negotiations between private individuals or parties to reach an agreement. In each of the given scenarios, we need to determine if private bargaining could be used to achieve a socially optimal outcome.

Scenario 1: LaShawn's neighbor mows his lawn during the night.

In this scenario, the action of LaShawn's neighbor mowing his lawn during the night is likely to cause noise pollution, which can be considered as a negative externality. It is not likely that private bargaining could be used to achieve a socially optimal outcome because the neighbor may not be aware of the negative impact on LaShawn and may not be willing to negotiate or change their behavior.

Scenario 2: Opening an Apple store in a mall causes overall sales in the mall to increase by 10%.

In this scenario, the opening of an Apple store in a mall has a positive externality of increasing overall sales in the mall. It is possible that private bargaining could be used to achieve a socially optimal outcome, as the increase in sales benefits both the Apple store and other businesses in the mall. The parties involved may be willing to negotiate and collaborate for mutual benefit.

Scenario 3: The production of steel results in pollution that affects millions of residents in the surrounding area.

In this scenario, the production of steel has a negative externality of pollution that affects a large number of people. It is not likely that private bargaining could be used to achieve a socially optimal outcome as the polluting steel producers may not have incentives to reduce pollution if they can externalize the costs onto the affected residents. Government intervention or regulations may be necessary to address the negative externality.

Answer 2

LaShawn's neighbor mows his lawn during the night.

DEPENDING ON HOW OFTEN LASHAWN'S NEIGHBOR MOWS HIS LAWN, A PRIVATE BARGAINING MIGHT BE USEFUL. IF THIS HAPPENS ONCE A MONTH, THE NEED OF INTERVENTION IS NOT SIGNIFICANT. BUT IF THIS HAPPENS MORE OFTEN, PROBABLY THEN BOTH MEIGHBORS WILL NEED TO BARGAIN AN OPTIMAL SOLUTION.

Opening an Apple store in a mall causes overall sales in the mall to increase by 10%.

THIS IS A POSTIIVE EXTERNALITY, THEREFORE, ANY TYPE OF INTERVENTION WILL PROBABLY MAKE THE SITUATION WORSE.

The production of steel results in pollution that affects millions of residents in the surrounding area.

IN THIS CASE, YOU NEED GOVERNMENT INTEREVENTION. POLUTION IS SOMETHING THAT AFFECTS THE GEENRAL PUBLIC, THEREFORE, IT MUST BE ADDRESSED BY THE EPA. IN CASE THE EPA AND OTHER GOVERNMENT INSTITUTIONS DECIDE TO DO NOTHING, THEN YES, PRIVATE BARGAINING WILL PROBABLY BE NECESSARY.