Refer to the Information Provided in Figure 16

question 101

Multiple Choice

Refer to the information provided in Figure 16.4 below to answer the question(s) that follow.
Los Angeles International Airport (LAX) is located next to Playa Del Rey. The noise from air traffic negatively affects individuals living in Playa Del Rey, however, this cost is not considered by airlines or air travelers. The airlines feel they have a right to use the airspace while the individuals living in Playa Del Rey feel they have the right to quiet. The following diagram depicts the marginal costs and marginal benefits associated with air travel. Figure 16.4
-Refer to Figure 16.4. Suppose the government assigns property rights to the airlines. No negotiations occur between the parties. The resulting level of air travel is

• A) 0 units.
• B) 100 units.
• C) 120 units.
• D) Indeterminate from the given information.

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Definitions:

Principal-Agent Problem

A dilemma in economics arising when one party (the agent) is able to make decisions and/or take actions on behalf of, or that impact, another party (the principal).

Moral-Hazard Problem

A situation where one party engages in risky behavior knowing that it is protected against the consequences, often because another party bears the cost of those actions.

Moral-Hazard Problem

The moral-hazard problem arises in situations where one party's willingness to take risks is increased because the negative consequences of those risks will be borne by another party.

Principal-Agent Problem

A dilemma in economics where one party (agent) is supposed to act in the best interest of another (principal) but may have a tendency to act in their own interest.