Assume that air pollution from a copper smelter imposes external ...

[drink]

Assume that air pollution from a copper smelter imposes external costs on people who live near the smelter. If the victims of the pollution could not legally enforce the right of their property not to be damaged, the amount of pollution reduction
 
  A) would be significantly less than if the owners of the smelter were legally liable for damages.
  B) would be less than the amount at which the marginal benefit of pollution reduction equaled the marginal cost.
  C) would be too small; the government would have to intervene to bring about an efficient outcome.
  D) would be the same as if it would be if the owners of the smelter were legally liable.

Question 2

How might unemployment benefits create a moral hazard problem?
 
  What will be an ideal response?

[akudia]

Answer to Question 1

D

Answer to Question 2

Moral hazard occurs when a principal cannot observe the actions of an agent. When moral hazard is present, someone's actions are their private information and affect the payoffs of others. In the case of unemployment benefits, moral hazard occurs because how hard someone is trying to find a job or what possibilities he is turning down is private information. Generous unemployment benefits imply weaker incentives to look for work and the possibility of a longer duration of unemployment.