1. Fig. 1 The Value of Another Guitar Lessons 12345 $25 $23 $21 $19 $17 Demand Flo Flo (again) Joe Bo Zoe Price Number of Lessons per Week While the first lesson is worth $25 to some consumer (Flo)... and the third is worth $21. the second lesson is worth only $23...

2. Fig. 2 The Additional Cost of Guitar Lessons The smallest cost for this first lesson is $13... and $17 for the third.but it's $15 for the second... 12345 $21 $19 $17 $15 $13 McCollum Supply Martin (again) Gibson Martin (again) Martin Price Number of Lessons per Week

3. Fig. 3 Efficiency in the Market for Guitar Lessons $25 $23 $21 $19 $17 $15 $13 Demand 1.Joe would pay as much as $23 for the second lesson... Flo Joe McCollum Martin Zoe Supply 2.while Martin would offer it for as little as $15. 15 Martin Gibson Martin 3.Four lessons is the equilibrium and the efficient quantity. Price Number of Lessons per Week 234 Bo

4. Fig. 4 Government Infrastructure and Output per Worker Low Quality of Infrastructure MediumHigh Average Output per Worker 2,000 6,000 10,000 14,000 $18,000

5. Fig. 5 The Inefficiency of Monopoly 2.A monopoly charges a higher price than a competitive market... 1.A competitive efficient market for guitar lessons would provide 4,000 at a price of $19. Number of Lessons per Week Dollars E 2,500 $22 $19 4,000 D MR MC 3.and produces a lower quantity. 4.Lessons with greater value than their costs are not provided.

6. Fig. 6 Regulating Natural Monopoly B $15 $29 A C MC $60 LRATC 50,000 DMR 85,000 100,000 Number of Households Served Dollars Unregulated monopoly "Fair rate of return" production F Efficient production (requires subsidy)

7. Fig. 7a A Tax on Producers to Correct a Negative Externality 100125 D S $1.00 A MSC C $0.50 B (a) Millions of Gallons per Period Dollars 2. The efficient quantity is here... 3.but the equilibrium quantity is here. 1.This market has a negative externality of $0.50 per unit. 4.In equilibrium, units that create greater costs than benefits are produced.

8. Fig. 7b A Tax on Producers to Correct a Negative Externality 100125 D $1.00 $0.50 B (b) Millions of Gallons per Period Dollars $1.30 $0.80 S Before Tax S After Tax 6. shifts the supply curve upward... 7.and moves the equilibrium to the efficient quantity. 5.A tax per unit on producers, equal to the negative externality per unit, A

9. Fig. 8a A Subsidy for Consumers to Correct a Positive Externality 800,0001,000,000 D S $100,000 MSB C A $30,000 2.The equilibrium quantity is here... 3. but the efficient quantity is here. 4.In equilibrium, units that provide more benefits than their cost are not produced. (a) Number of Degrees per Year Dollars 1.This market has a positive externality of $30,000 per college degree. B

10. S Fig. 8b A Subsidy for Consumers to Correct a Positive Externality 800,0001,000,000 $100,000 B A $30,000 Number of Degrees per Year Dollars (b) $114,000 $84,000 D Before Subsidy D After Subsidy 6.shifts the demand curve upward... 5.A subsidy per unit for consumers equal to the positive externality per unit... 7.and moves the market to the efficient quantity

11. Fig. 9 Pure Private, Pure Public, and Mixed Goods More Nonexcludable More Excludable More Rival More Nonrival Mixed Good Pure Private Good Mixed Good Pure Public Good food, clothing, housing sold-out movie crowded highway newspaper software movie with empty seats uncrowded highway downloaded music file cable television urban park national defense, legal system police and fire protection crowded city streets fish in international waters