Suppose two neighborhoods (A and B) have identical housing, but neighborhood A has a strictly enforced deed restriction that prohibits homeowners from parking junk cars in the front yard.
If houses in neighborhood A sell for 105,000 and houses in neighborhood B sell for 100,000, how would an economist value the external cost of visible junk cars, per house? A) 205,000
B) 105,000
C) 100,000
D) 5,000
E) None of the above answers is correct.
Question 2
What problem is caused by subsidizing a natural monopoly regulated using a marginal cost pricing rule?
A) The regulated firm ends up earning an economic profit.
B) Consumers pay too much for the product of the monopoly.
C) This policy is a two-part tariff, which creates inefficiency.
D) The taxes required to gain the revenue used as the subsidy result in a deadweight loss that subtracts from gains in efficiency which result from use of the marginal cost pricing rule.
E) The regulated firm goes out of business if it is subsidized.
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