Your neighbor in an apartment complex plays his music very loudly late at night, which makes it difficult for you to get to sleep. You offer the neighbor $50, the monetary value you put on your sleep, to never play his music between midnight and 7 AM. By
doing so
A) you have failed to bring about an efficient solution since you should have complained to the police.
B) you have indicated the cost of the externality. The externality is not internalized even if he accepts your offer.
C) you have indicated the cost of the externality, which internalizes the externality.
D) you have indicated a willingness to make the external cost a social cost.
Answer: C
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What measure reflects the overall cost of goods and services produced domestically?
The substitution effect argues that a consumer
A) will always use the additional purchasing power from a price decrease to purchase more of both goods. B) will not purchase more of a good when its price falls. C) will purchase more of a good that has become relatively cheaper, and less of a good that has become relatively more expensive. D) will purchase less of both goods if his or her real income increases.