Question

T/F:

If your consumption of loud music produces negative externalities for your neighbors (which you ignore), then you are consuming more loud music than is Pareto optimal.

T/F:

The only known way to eliminate externalities is through taxes and subsidies.

Answer 1

Question 1

An equilibrium outcome achieved will not be considered as Pareto Optimal outcome if such outcome leads to either positive or negative externality.

In given case, consumption of loud music is creating negative externality.

Since, negative externality is being created, consumption is not Pareto Optimal.

Moreover, in case of negative externality, private consumption or production exceeds the socially optimal level.

So, consumption of loud music is much more than the Pareto Optimal level.

Thus, the given statement is True.

Question 2

Apart from taxes and subsidies, negotiation or bargaining can be used to eliminate externalities as examplified by Coase Theorem.

So, taxes and subsidies are not the only known ways to eliminate externalities.

Thus, the given statement is False.