A Dentist Shares an Office Building with a Radio Station

question 102

Multiple Choice

A dentist shares an office building with a radio station. The electrical current from the dentist's drill causes static in the radio broadcast, causing the radio station to lose $10,000 in profits. The radio station could put up a shield at a cost of $30,000; the dentist could buy a new drill that causes less interference for $6,000. Either would restore the radio station's lost profits. What is the economically efficient outcome?

• A)The radio station puts up a shield, which it pays for.
• B)The radio station puts up a shield, which the dentist pays for.
• C)Neither the radio station nor the dentist purchase additional equipment.
• D)The dentist gets a new drill; it does not matter who pays for it.

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Definitions:

Widgets

A hypothetical or generic product often used in economic examples and problems to represent any type of good or service.

Externalities

Costs or benefits arising from an economic activity that affect bystanders and are not reflected in market prices.

Distortionary Taxes

Taxes that cause changes in behavior and decision-making, leading to inefficiencies in the market.

Nonneutral Taxes

Taxes that disproportionately affect one group or type of economic activity over another, often used to influence market outcomes.