Chapter 13 Externality and Public Goods
Multiple Choice
1. Market failure in the form of externalities arises when ( b )
a.production costs are included in the prices of goods.
b.not all costs and benefits are included in the prices of goods.
c.the benefits exceed the costs of consuming goods.
d.the market fails to achieve equilibrium.
2. Which of the following is an example of a positive externality? ( c )
a.Air pollution.
b. A person litters in a public park.
c. A nice garden in front of your neighbor’s house.
d.The pollution of a stream.
3. The social cost of a good is ( c )
a.its benefit to the people who buy and consume it.
b.its total benefit to everyone in society.
c.its cost to everyone in the society that occurs in addition to the private costs.
d.the cost paid by the firm that produces and sells it.
4. The private benefit of consuming a good is ( a )
a.its benefit to the people who buy and consume it.
b.its total benefit to everyone in the society.’
c.its cost to everyone in the society.
d.the cost paid by the firm that produces and sells it.
5. When a person drives a car that pollutes the air ( c )
a.the private cost of consuming the car’s services exceeds the social cost.
b.the private benefit of consuming the car’s services exceeds the social benefit.
c.the social cost of cons uming the car’s services exceeds the private cost.
d.the social benefit of consuming the car’s services exceeds the private benefits.
6.If a perfectly competitive industry is not forced to take account of a negative
externality it creates, it will produce where ( a )
e.the marginal cost of production equals the marginal private benefit.
f.the marginal cost of production equals the marginal social benefit.
g.the marginal social cost of production equals the marginal social benefit.
h.price equals marginal social benefit.
7. Flu shots are associated with a positive externality. (Those who come in contact with people who are inoculated are helped as well.) Given perfect competition with no government intervention in the vaccination market, which of the following holds? ( d )
a.At the current output level, the marginal social benefit exceeds the marginal private
benefit.
b.The current output level is inefficiently low.
c. A per-shot subsidy could turn an inefficient situation into an efficient one.
d.All of the above hold.
8. Because there are positive externalities from higher education, ( a )
a.private markets would provide too little of it.
b.private markets would provide too much of it.
c.the government should impose a tax on college students.
d.the government should impose a tax o n students’ families.
9. This diagram represents the tobacco industry. Which of the following would be included in the supply (private cost) curve? ( a )
a.The cost of labor.
b.The cost to the government of the hospital expenses of smokers with cancer.
c.The increased risk of cancer to the nonsmoking passengers in the smoker’s car pool.
d.The price of a pack of cigarettes.
10. Internalizing an externality means ( d )
a.the good becomes a public good.
https://www.doczj.com/doc/d510950042.html,ernment regulations or taxes are sufficient to eliminate the externality completely.
https://www.doczj.com/doc/d510950042.html,ernment imposes regulations that eliminate the externality completely.
d.incentives are altered so that people take account of the external effects of their
actions.
11. Why can’t private individuals always internalize an extern ality without the help of government? ( b )
a.Legal restrictions prevent side payments between individuals.
b.Transactions costs may be too high.
c.Side payments between individuals are inefficient.
d.Side payments between individuals violate equity standards.
12. What economic argument suggests that if transactions costs are sufficiently low, the equilibrium is economically efficient regardless of how property rights are distributed? ( a )
a.The Coase Theorem.
b.Say’s Law.
c.The Law of Comparative Advantage.
d.The Law of Supply.
13. Assume the production of the product in the figure imposes a cost on society of $7.00 per unit. If the free market equilibrium output is 50 units, the government should ( d )
a.impose a tax of $2.50 per unit.
b.reduce the output of the firm by approximately 39 units.
c.impose a lump-sum tax of $350 per perio
d.
d.impose a tax of $7.00 per unit.
14. A benefit of taxes over regulation to internalize externalities is ( d )
a.it is easier to choose the optimal amount of taxes than the optimal amount of
regulation.
b.regulations are more difficult to impose than taxes.
c.taxes equate the social costs with the social benefits.
d.taxes provide incentives to adopt new methods to reduce the externality.
15. If the government wants to tax a polluter, the economically efficient outcome occurs when ( a )
a.the marginal tax equals the marginal cost to other people from the pollution.
b.the average tax equals the average cost to other people from the pollution.
c.the total tax equals the total cost to other people from the pollution.
d.the tax is high enough to stop pollution completely.
16. Which of the following is NOT a method that could effectively deal with negative externalities? ( a )
a.Relying on voluntary compliance.
b.Taxing the output of industries that pollute.
c.Creating legal environmental standards.
d.Increasing public spending on cleanup and reduction of pollution.
17. A common complaint about environmental regulation and enforcement is that it ( c )
a.applies only to firms that produce goods, not services.
b.is politically motivated and so always misdirected.
c.can be too burdensome to producers who can pay the fines more easily than they can
reduce pollution.
d.results in more pollution than without the regulations.
18. The benefit to a pollution tax over other forms of internalizing a pollution externality is that ( c )
a.eliminates pollution completely.
b.forces cleanup to occur.
c.is imposed only on the market with the externality.
d.creates positive externalities to compensate for negative externalities.
19. Pollution permits ( b )
a.impose regulations on firms that they must achieve.
b.set a quantity of pollution that will exist.
c.cannot be traded between firms in order to make sure that the worst offenders must
clean up their production processes.
d.are efficient because they eliminate all pollution.
20. This diagram shows the market for pollution when permits are issued to firms and traded in the marketplace. The equilibrium price of pollution here is ( b )
a.$500.
b.$1000.
c.$1500.
d.$2000.
21. Which of the following is NOT a characteristic of a public good? ( c )d
a.It requires resources to produce.
b.It is not diminished or depreciated as additional people consume the good.
c.Its benefits cannot be withheld from anyone.
d.It is a free good with zero opportunity cost.
22. Which of the following would be the best example of a public good? ( c )
a. A candy bar.
b. A painting by Monet.
c. A beautiful sunset.
d. A crowded beach.
23. To achieve the optimal provision of public goods ( d )
a.the market should be allowed to find its equilibrium without government intervention.
b.the government must limit the provision of the goods.
c.the government must tax producers of these goods.
d.the government must either provide the goods or subsidize their production.
24. Public goods are ( d )
a.rival and excludable.
b.rival but excludable.
c.nonrival but excludable.
d.nonrival and nonexcludabl
e.
25. Private goods are ( a )
a.rival and excludable.
b.rival but excludable.
c.nonrival but excludable.
d.nonrival and nonexcludabl
e.
26. Who among the following is a free rider? ( d )
a.Barry steals candy from the store where he works.
b.Betty regularly uses the local public library in the town in which she lives.
c.Joe drives 20,000 miles a year on public streets, but he pays no more in taxes than
Sam, who only drives 1,000 miles.
d.Fred watches many public television programs, but he has never sent in a contribution
to the station.
27. People have little incentive to produce a public good because ( c )
a.the social benefit is less than the private benefit.
b.the social benefit is less than the social cost.
c.there is a free-rider problem.
d.there is a tragedy of the commons.
28. The free-rider problem ( d )
a.forces supply of a public good to exceed demand.
b.allows more people to pay for the public good than if it were a private good.
c.encourages overuse of a good that is freely available.
d.holds the equilibrium quantity of a public good below the economically efficient level.
29. If the marginal cost of national defense is constant at $12 per unit, what is the efficient level of national defense to provide? ( c )
a. 6 units.
b.13 units
c.22 units.
d.33 units.
30. A drawback of government provision of a public good is that ( a )
a.the government lacks information about what people are willing to pay for the good.
b.taxes have to be raised to pay for the good.
c.the government does not provide enough of any public goo
d.
d.it would be cheaper for the private sector to provide the good.
31. A drawback of government provision of a public good is that ( a )
https://www.doczj.com/doc/d510950042.html,ernment programs may reflect political considerations rather than economic
efficiency.
b.taxes have to be raise to pay for the good.
c.the government does not provide enough of any public goo
d.
d.it would be cheaper for the private sector to provide the good.
32. The “open source” movement in the technology industry supports th e idea that programming code should be made freely available. This group believe that ( c )
a.there is a negative externality generated by technological advancement when private
property rights are enforced.
b.the costs of maintaining private property rights are greater than the benefit to society
of making advances freely available.
c.the costs of maintaining private property rights are less than the benefits to society of
making advances freely available.
d.the costs and benefits of making advances freely available exactly offset one another.
33. If antipoverty and public assistance programs are public goods, then ( a )
a.the private benefits to society of providing such programs are undervalued.
b.the private marketplace can provide a socially optimal quantity of these programs
with no government interference.
c.the private benefits to society of providing such programs are overvalue
d.
d. a and b are both correct.
34. The best way of determining the value of a human life is to ( b )
a.evaluate the value of their expected earnings in the labor market.
b.evaluate the risks people are willing to take and what they would have to be paid to
take them.
c.determine how much money a person had at the time of death.
d.do nothing; human life is priceless.
35. A television signal is an example of ( b )
a. a private good
b. a nonrival good.
c. a social goo
d.
d. a normal good.
36. Music is an example of ( c )
a. a private good.
b. a social good.
c. a nonrival goo
d.
d. a common good.
37. The commercial value of ivory a threat to the elephant, but the commercial value of beef is a guardian of the cow. This is because ( b )
a.the cow is raised in developed economies while the elephant lives primarily in less-
developed nations.
b.cows are private goods while elephants tend to roam without owners.
c.cows and elephants are public goods, but ivory is nonrival.
d.ivory is nonrival and nonexclusive but beef is rival and exclusiv
e.
38. What causes the tragedy of the commons? ( d )
a.Social and private incentives differ.
https://www.doczj.com/doc/d510950042.html,mon goods are nonrival and nonexclusive.
https://www.doczj.com/doc/d510950042.html,mon goods are nonexclusive, but rival.
d.Both A and C are correct.
39. The overuse of a common resource relative to its economically efficient use is called ( b )
a.monopolistic competition.
b.tragedy of the commons.
https://www.doczj.com/doc/d510950042.html,mon resource abuse.
https://www.doczj.com/doc/d510950042.html,munism.
40. The tragedy of the commons is ( b )
a.the fact that government regulation is required to combat externalities.
b.the overuse of a common resource relative to its economically efficient use.
c.the idea that monopoly elements in society lead to inefficient production.
d.the false hope that government can solve our social problems.
41. When species of life are endangered because they are overhunted, the problem is said to be ( d )
a.economically unsound.
b.environmentally inefficient.
c. a positive externality.
d. a tragedy of the commons.
42. An overcrowded beach is an example of ( b )
a. a positive externality.
b. a tragedy of the commons.
c.environmentally inefficient.
d.economically unsound.
43. One economically efficient way to eliminate the tragedy of the commons is to ( d ) tax the owners of the resource.
a.prevent anyone from using the resource.
b.reduce the marginal social benefit of the resource.
c.establish private ownership of the resource.
Short Answer And Essay
1. Discuss the difference between a private cost and a social cost.
Answer:
A private cost is the cost of producing a good or service that is borne by the producers. In certain instances, however, some of the costs of production are borne by someone other than the producer. This cost is called an external cost. The social cost is the total cost borne by all of society. Thus the social cost equals the private cost, the costs borne by the producers, plus the external cost, the costs borne by everyone else.
2. Fully explain why a producer who is causing external costs does not have the incentive to reduce these costs.
Answer:
The answer lies in the fact that the costs are external. These are not costs borne by the producer. The producer responds to the costs he or she must pay and external costs are paid by someone else. Hence the producer has no incentive to decrease the activity that is creating the external cost because the activity costs the producer nothing.
3. If the production of a good creates an external cost, is the supply curve the same as the marginal social cost or the same as the marginal private cost curve or both? Answer:
The supply curve is always the same as the marginal private cost curve. In the case of an external cost, however, the marginal private cost curve is not the same as the marginal
social cost curve. In this case, the supply curve is the same as only the marginal private cost curve and is not the same as the marginal social cost curve.
4. Why does an external cost lead to inefficient overproduction?
Answer:
If there is an external cost, then the market supply curve represents only the private costs rather than the total costs of production. Private producers respond only to the costs that they pay. In the case of an external cost, because producers are not paying all of the costs, they produce too much of the good from the social perspective, that is, there is overproduction. Thus government policies, such as taxes, emission charges, or marketable permits, that mean the producers pay all the costs of their production move the market toward efficiency.
5. Why is it not efficient to eliminate all pollution?
Answer:
Eliminating pollution is a task that uses resources, and therefore has a cost. If the cost of eliminating another unit of pollution is greater than the benefit, it would not be an efficient use of resources to eliminate the pollution because there are other activities with a higher value to society. In other words, pollution elimination is similar to any other good: pollution should be eliminated until the marginal benefit of pollution reduction equals the marginal cost of pollution reduction.
6. What is the Coase theorem? What conditions need to be present for this theorem to work?
Answer:
The Coase theorem states that if property rights over a resource are clearly defined and are enforceable, then private transactions are efficient and the outcome is not affected by who is assigned the property right.
The conditions that need to be present for the Coase theorem to work are:
property rights are clearly defined;
the transactions costs of the negotiations must be small, eg, there are a small number of parities involved.
If these conditions are met, then the Coase theorem applies and there are no externalities.
7. What do we mean by “property rights” and why are they important?
Answer:
Property rights are legally established titles to ownership, use, and disposal of factors of production and goods and services that are enforceable in the courts. Property rights are important because ownership of a resource provides a strong incentive to its owner to see that the resource they own is not damaged, overused, or degraded.
8. If the production of a good causes pollution (an external cost) will the unregulated competitive market equilibrium of that product produce an efficient outcome? Answer:
The presence of pollution means that the supply curve of the firm, which is also the firm’s marginal cost curve, only represents the firm’s private costs and ignores all
external costs. The equilibrium between supply and demand curves leads to overproduction of this good. The amount produced, therefore, is not efficient because the level of production occurs where the marginal private cost equals the marginal (social) benefit rather than where the marginal social cost equals the marginal (social) benefit. 9. Use the idea of external costs to explain why some cities have laws against late-night rock concerts.
Answer:
While many people might like to see a midnight show featuring AC/DC or Creed, many others argue that a rock concert blaring away early in the morning imposes external costs on many nearby residents who do not want to be disturbed late at night. Therefore regulations on the time that music can be “emitted” are common. To the extent that the regulations are motivated by the externality, such regulations increase efficiency.
10. List and briefly define the three methods government can use to cope with an external cost, such as pollution.
Answer:
The three methods are emission charges, marketable permits, and taxes. Emission charges set a price per unit of pollution that the firm pays to the government. Marketable permits are permits given to firms that allow them to pollute by an amount assigned by the permit. The permits can be bought and sold among firms. Taxes can be imposed on polluting firms. If this tax equals the marginal external cost, efficiency can be attained.
11. Describe some of the external benefits associated with education. What can government do to encourage production of the efficient amount of education? Answer:
External benefits to education include the facts that college graduates:
communicate more effectively with others,
tend to be better citizens,
have lower crime rates,
are more tolerant of others’ views.
To insure that the efficient amount of education is produced, the government could: provide education, as it does with public schools,
subsidize education, as it does with state universities, or
give consumers vouchers to reduce the cost of private schooling, as is happening in some states or with various college grant programs.
12. “A government subsidy can increase the production of a product whereas a tax can decrease the production of a product. Hence a government subsidy is the appropriate policy to use with a product that has an external cost and a tax is the appropriate policy to use with a product that has an external benefit.” Comment on the accuracy of the previous two sentences.
Answer:
The first sentence is correct but the second sentence is incorrect. For a product with an external cost, overproduction, that is, producing more than the efficient quantity is the problem. A tax could be imposed in order to decrease the quantity toward the efficient
amount. Conversely, for a product with an external benefit, underproduction, that is, producing less than the efficient quantity is the problem. For this situation, a subsidy could be granted in order to boost production toward the efficient level.
13. Why does government provide educational opportunities in the form of vouchers, subsidies, and public provision?
Answer:
Education generates external benefits. With a better educated population, everyone is better off. The more educated the population, the more productive it is. Educated individuals need less social services than uneducated individuals. Crime rates are lower the more educated the population. And a more educated population makes it more likely to provide other goods with external benefits, such as high quality newspapers. But because part of the social benefit from education is an external benefit, an unregulated market will create less than the efficient amount of education. Hence government policies such as vouchers, subsidies, and public provision are attempts to overcome inefficiency and move the market to the efficient amount of education.
14. A private subsidy has what effect on the amount of a good or service produced? Is a subsidy an appropriate policy to offset the inefficiency from an external cost or an external benefit?
Answer:
A private subsidy increases the production of the good or service that is subsidized. Because it increases the production, a private subsidy is the appropriate policy to overcome the inefficiency that is the result of an external benefit. (A good or service with an external benefit is underproduced by a competitive, unregulated market.)
15. Explain the process by which a private subsidy corrects an external benefit. Answer:
If a good or service has an external benefit, an unregulated competitive market will produce less than the efficient quantity. A private subsidy, which is money given to firms, reduces the cost of production. With the subsidy, firms are willing to produce more at any given price. If the subsidy equals the marginal external benefit, production with the subsidy will be at the efficient level.
16. What does it mean for a go od to be “nonexcludable”?
Answer:
A good is nonexcludable if it is technologically impossible, or extremely impossible, to prevent someone from consuming it even if they have not paid for it.
17. What are the differences between public goods and private goods?
Answer:
Public goods are
consumed by everyone,
nonrival, which means that consumption by one person doesn’t decrease the quantity available for oth ers’ consumption, and
nonexcludable, so that it is impossible or very costly to prevent people from consuming the good even if they did not pay for the good.
In contrast, private goods are
consumed one person at a time,
rival, so that consumption by one person decreases the amount available for consumption by another person, and
excludable, which means that it is possible to prevent someone from enjoying the benefits of consuming the good unless they pay for the good.
18. Some goods are public goods; others are private goods; and still others are mixed. Describe a mixed good, and provide an example of a mixed good.
Answer:
A mixed good is a good that has some aspect of a public good, but is not a pure public good. For instance, a good might be nonrival but excludable. Hence the good is not a pure public good nor is it a pure private good. An example of a mixed good is an uncrowded highway. This highway is nonrival because one person driving on it will not preclude anyone else from driving on it. However, a highway is easily excludable, because it might be a toll highway.
19. What is the free-rider problem and with what is it associated?
Answer:
The free-rider problem is associated with public goods. The free-rider problem is that no one has an incentive to pay their share of the cost of providing a public good. Hence everyone tries to free ride, that is, consume the public good without paying for it.
20. “The principle of increasing marginal cost does not apply to public goods.” Is this statement correct or not?
Answer:
The statement is false. For both public goods and private goods, the marginal cost increases as more of the good is produced.
21. Protection of rivers in Idaho is a public good. If the marginal cost of protecting rivers in Idaho exceeds the marginal benefit of river protection, is there more than, less than, or the efficient amount of river protection taking place?
Answer:
If the marginal cost exceeds the marginal benefit, there is more than the efficient amount of protection taking place. The efficient amount is the quantity such that the marginal benefit equals the marginal cost. Any other amount creates a deadweight loss.
22. How is the efficient quantity of public goods determined?
Answer:
The efficient quantity of a public good is determined in the same way as the efficient quantity of any good: by comparing marginal cost and marginal benefit, and producing where one equals the other. The marginal cost of a public good is calculated similarly as the marginal cost for a private good. It is based on the cost of producing one more unit of the good. The marginal benefit, however, is calculated differently for a public good than
for a private good. For a public good, the economy’s marginal benefit is determined by summing the individual marginal benefits at each quantity of the public good. Once the marginal cost and marginal benefits are known, the efficient quantity is equal to the quantity such that the marginal cost equals the marginal benefit.
23. Why isn’t national d efense provided by free markets?
Answer:
National defense is a public good. This fact means that it is hard to exclude anyone from consuming the benefits of national defense. If left to the free market, it would be very difficult for private companies to charge people for protection. People would be unwilling to pay for the service because they can get it without paying. The free-rider problem would make the ability to earn a profit a difficult or impossible prospect and hence little or no defense would be provided.
24. Under what conditions will the political process provide an inefficient amount of
a public good?
Answer:
The government will provide an inefficient amount of a public good when voters are rationally ignorant of the marginal benefits and marginal costs of the good. In this case, bureaucrats, intent on maximizing the size of their budgets, will provide an inefficiently large quantity of the good.
Numeric And Graphing
1. If the marginal social cost of a good is $70 and the marginal external cost is $20, what does the marginal private cost equal?
Answer:
The marginal social cost equals the marginal private cost plus the marginal external cost. Hence, substituting in the numbers from the problem gives $70 = marginal private cost + $20, so that the marginal private cost = $50.
Quantity (tons of paper) Marginal
private cost
(dollars)
Marginal
external cost
(dollars)
Marginal
social cost
(dollars)
100 10 5 ___
200 20 10 ___
300 30 15 ___
400 40 20 ___
500 50 25 ___
2. The table above gives the private costs and external costs of producing paper.
a. Complete the table by finding the marginal social cost at each level of production.
b. If the market is competitive and is left unregulated and 400 tons of paper are produced, what is the price of a ton of paper?
c. If the government imposes a tax equal to the external cost at each level of production, what price would be charged if 400 tons are produced? Answer:
Quantity (tons of paper) Marginal
private cost
(dollars)
Marginal
external cost
(dollars)
Marginal
social cost
(dollars)
100 10 5 15
200 20 10 30
300 30 15 45
400 40 20 60
500 50 25 75
marginal social cost equals the sum of the marginal private cost plus the marginal external cost.
b. The price will equal the marginal private cost of $40 a ton.
c. If a tax is imposed equal to the marginal external cost, when 400 tons of paper are produced this tax will be $20 a ton. Hence the price will rise by $20, to $60 a ton, which is the same as the marginal social cost.
3. The above figure shows the market for fertilizer. When fertilizer is applied to lawns, it runs off into neighboring streams and ponds, killing fish and creating an external cost.
a. What is the equilibrium price and quantity of fertilizer in an unregulated, competitive market?
b. What is the efficient quantity of fertilizer?
c. Suppose government imposes a tax equal to the marginal external cost. What is the equilibrium price paid by consumers and the equilibrium quantity after implementation of the tax?
d. At the output level in part (c), how much is the tax?
e. How much tax revenue does government collect?
f. What is the deadweight loss borne by society if the externality is left uncorrected? Answer:
a. The equilibrium price is $1,000 a ton and the equilibrium quantity is 6 tons per day.
b. The efficient quantity is 4 tons per day.
c. The price paid by consumers after the tax is $1,200 a ton and the equilibrium quantity is the efficient quantity, 4 tons per day.
d. The tax is $400 a ton.
e. The government collects $1,600 a day in taxes.
f. The deadweight loss with no government action is $600 a day.
4. The figure above shows the market for steel, the production of which creates pollution.
a. What point represents the equilibrium price and what point represents the equilibrium quantity in an unregulated, competitive market?
b. What area represents the deadweight loss of the unregulated, competitive market outcome?
c. What point represents the efficient quantity?
d. If the output level in part (c) was achieved through the use of a government imposed tax, what price would consumers pay? What price would the producers receive? What distance represents the amount of the tax?
e. If government successfully uses marketable permits to eliminate the external cost, what point represents how much output would be produced?
Answer:
a. The price is given by point c and the quantity is given by point f.
b. The deadweight loss is area gij.
c. The efficient quantity is given by point e.
d. Consumers would pay a price represented by point b. Producers would receive a price represented by point d. The amount of the tax is the distance bd (which is the same as gh).
e. The amount of output would be the efficient quantity, represented by point e.
5. The figure above shows the market for polio vaccination in Africa. Polio vaccination confers an external benefit because one person’s vaccination makes it less likely that other people will catch polio.
a. If the market is competitive and left unregulated, how many doses of vaccine will be administered?
b. If the Melinda and Bill Gates Foundation underwrites the cost of the vaccine by paying for a large fraction of the preparation and delivery cost, what will happen to the number of doses administered? Why?
Answer:
a. If the market is competitive and left unregulated, 4 million doses will be administered.
b. If the Foundation underwrites the cost of the vaccine, the marginal cost of the vaccine will drop. The result will be similar to a government subsidy: the marginal cost curve will shift rightward, thereby increasing the number of doses administered. The market’s efficiency will be increased.
6. Attractive landscaping increases the property values of surrounding homes, creating a marginal benefit. The figure above represents the market for monthly landscaping contracts.
a. What is the marginal social benefit of the 40th contract? Of the 60th contract?
b. What is the marginal private benefit of the 40th contract?
c. What is the marginal external benefit of the 40th contract?
d. What is the unregulated competitive equilibrium price and quantity?
e. What is the efficient quantity?
f. What is the amount of the deadweight loss?
Answer:
a. The marginal social benefit of the 40th contract is $100. The marginal social benefit of the 60th contract is $80.
b. The marginal private benefit of the 40th contract is $60.
c. The marginal external benefit of the 40th contract is $40.
d. The equilibrium price is $60 per contract and the equilibrium quantity is 40 contracts a month.
e. The efficient quantity is 60 contracts a month.
f. The deadweight loss equals $400 per month.
7. The figure above shows the market for education. Education has an external benefit.
a. If the market is competitive and left unregulated, how many students will be enrolled per year?
b. What is the efficient number of students?
c. In the figure, show the effect of a government subsidy that moves the market to the efficient number of students. What is the amount of the subsidy and what tuition must the students pay?
Answer:
a. If the market is competitive and left unregulated, 4 million students will be enrolled.
b. The efficient number of students enrolled is 6 million students.
c. The above figure shows the effect of the government subsidy and how the supply curve shifts. The subsidy is $6,000 and students pay tuition of $10,000.
Quantity (police cars on duty) Paul’s marginal
benefit
(dollars per car)
Art’s marginal
benefit
(dollars per car)
1 50 90
2 40 75
3 30 60
4 20 45
5 10 30
8. The table above shows the marginal benefit that arises from providing police protection in an economy of two people, Paul and Art.
a. Construct a table of the economy’s marginal benefit from providing police protection.
b. What is the economy’s marg inal benefit from having 3 police cars on duty? Answer:
Quantity Economy’s marginal
(police cars on duty) benefit (dollars per car)
1 140
2 115
3 90
4 65
5 40
a. The table showing the economy’s marginal benefit from providing police protection is above. At each quantity, the economy’s marginal benefit is the sum of Paul’s marginal benefit plus Art’s marginal benefit.
b. The economy’s marginal benefit from having three cars on duty is $90.
Level of contaminants (parts per million) Marginal benefit
(dollars per year)
Marginal cost
(dollars per year)
15 7 4 10 12 12 5 16 16 0 20 24
Quantity (lights per block) Marginal benefit
(dollars per year)
Marginal cost
(dollars per year)
1 14 4
2 12 7
3 10 10
4 8 13
5 6 16
6 4 19
9. There are three groups in a community. Their demand curves for public television in hours of programming, T, are given respectively by
W1 = $150 - T, W2 = $200 - 2T, W3 = $250 - T.
Suppose public television is a pure public good that can be produced at a constant marginal cost of $200 per hour.
a.What is the efficient number of hours of public television?
b. How much public television would a competitive private market provide? Answer:
a. The efficient number of hours is the amount such that the sum of the marginal benefits is equal to marginal cost. Given the demand curves representing the marginal benefits to each individual, we sum these demand curves vertically to determine the sum of all marginal benefits. Figure 18.6.a shows each demand curve and the summation.
individual demand curves horizontally. The efficient number of hours is such that the private marginal cost is equal to the private marginal benefit. The demand curves for groups 1 and 3 lie below MC = $200 for all T > 0. With marginal cost equal to $200, only group 3 would be willing to pay $200. At that price, 50 hours of programming would be provided on a subscription.