1. What is an internality and how does it differ from an externality? What behavioral aspect leads to
internalities? When this behavioral aspect is present, what does it imply about the ability of the traditional
microeconomic individual optimization model to maximize someone’s utility? Name two kinds of
evidence for the existence of this behavioral aspect. Finally, compare and contrast the overall social
problems associated with internalities with regard to smoking and drinking.
2. Economists and educators have developed two competing theories to explain why higher educational
attainment is associated with higher productivity and higher earnings. Explain, compare, and contrast the
human capital theory with the screening theory in explaining why more educated workers earn more on the
job. Consider the role of educational content in each explanation. What are the implications of each theory
in terms of the most appropriate and efficient educational policy? Which theory seems to be more
accurate?
