1) Define the concept of an “externality.” Why will unregulated market systems not allocate resources efficiently where externalities are present? Draw a diagram to illustrate the
overallocation of resources to a market characterized by negative externalities.
2) If an industrial process emits a pollutant, is it more efficient to: 1) monitor the amount of pollutant emitted by each firm and establish a tax per unit of pollutant, or to 2) simply establish an excise tax on the output of the industry? Explain your answer.
3) What is the economic justification for zoning laws, which restrict the private property owner’s right to do what he or she wants with his or her property?
4) In the Great Plains states west of the Mississippi river, annual rainfall is less than annual water usage for irrigation. The level of groundwater in the Ogallala aquifer that underlies the region is dropping precipitously. On its western edges the aquifer has already run dry and ghost towns exist. Does this depletion of the groundwater represent an efficient use of resources? If not, why aren’t unregulated markets efficiently allocating the scarce resource of groundwater in this area? What policy remedy would you suggest?