Part 2 一 Public Expenditure: Public Goods and Externalities
Chapter 4 一 Public Goods
Brief Outline
1. Public Goods Defined
2. Efficient Provision of Public Goods
a. Deriving the Efficiency Condition b? Problems in Achieving Efficiency c. The Free Rider Problem
3. Privatization
a. Public versus Private Provision b. Public versus Private Production
4. Public Goods and Public Choice
Answers to End-of-Chapter Questions
1?
a. Wilderness area is an impure public good 一 at some point, consumption becomes nonrival; it is, however, nonexcludable?
b. Satellite television is nonrival in consumption, although it is excludable; therefore it is an impure public good. c. Medical school education is a private good.
d. Television signals are nonrival in consumption and not excludable (when broadcast over the air). Therefore, they are a public good. e. An automatic teller machine is rival in consumption, at least at peak times. It is also excludable as only those patrons with ATM cards that are accepted by the machine can use the machine. Therefore the ATM is a private good? 2.
a. False? Efficient provision of a public good occurs at the level where total willingness to pay for an additional unit equals the marginal cost of producing the additional unit. b. False. Due to the free rider problem, it is unlikely that a private business firm could profitably sell a product that is non-excludable. However, recent research reveals that the free rider problem is an empirical question and that we should not take the answer for granted. Public goods may be privately supported through volunteerism, such as when people who attend a fireworks display voluntarily contribute enough to pay for the show. c. Uncenaim This statement is tme if the road is not congested, but when there is heavy traffic, adding another vehicle can interfere with the drivers already using the road. d. False. There will be more users in larger communities, but all users have access to the quantity that has been provided since the good is nonrival, so there is no
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reasons larger communities would necessarily have to provide a larger quantity of the nonrival good.
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Part 2 - Public Expenditure: Public Goods and Externalities
3. We assume that Cheetahs utility does not enter the social welfare function; hence, her allocation of labor supply across activities does not matter.
a. The public good is patrol; the private good is fruit?
b. Recall that efficiency requires MRS I ARZAN + MRSJANE = MRT. MRSTARZAN = MRSJANE = 2. But
MRT= 3. Therefore, MRSTARZAN + MRSJANE MRT. To achieve an efficient allocation, Cheetah should patrol more? 4. The Search for Extra-Terrestrial Intelligence is a public good because it is nonrival and presumably non-excludable? The government should pay for the research only if the SMB is greater than the SMC. 5? Wine and liquor are both rival and excludable goods, so public sector production is not justified on the basis of public goods. Therefore, it makes no economic sense to have public production. 6. It is unlikely that if Pemex were privatized that the situation would lead to a monopoly situation?
Comparing oil production to telephone service is not a correct comparison. In the case of the telephone company, there was only one provider of telephone service? In the case of oil production, there would be only one producer in Mexico, but many competitors providing oil from which Mexico could buy. The newly privatized company would have to compete to sell its goods? It would likely become more efficient than the state run company because of this competition. 7? These amenities being present in private airports alone would not be enough to recommend that airports be privately run. If fliers desire such amen让ies，it is not clear that they cannot be provided in public airports via renting space. One would also need information on the cost of running the
airports and distributional issues that might exist for publicly run airports versus privately run airports before recommending that airports be privately run. 8. The experimental results on free-riding suggest that members of the community might voluntarily contribute about half of the required amount. The reason these citizens wanted to use private
fundraising was because the state government redistributed tax dollars from wealthy districts to poor districts (the so-called Robin Hood plan), so using private donations was a way to avoid losing tax dollars to other districts? 9? Books are not a public good. They are both rival (two people cannot read a book at the same time) and excludable (you can keep a person from reading a book). But if the goods libraries provide are a sense of community or a better educated populace, these would qualify as public goods. If the public good aspect of the library is to produce a better educated populace, then perhaps the classic books are a better choice.
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10. Hiring private military finns to provide military support in Afghanistan, Iraq, or Darfiir would be similar
to the example of airport security in the text. One might argue that a private firm would not provide adequate training, use unethical or especially aggressive methods to shorten the conflict, thus lowering costs to increase profits. Proponents would argue that such things could be stipulated in a well-written
Copyright ? 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw?Hill Education ?
Chapter 4 - Public Goods
contract. However, no contract can specify every possible contingency. In high conflict situations this may be especially true as the opposing side will not be predictable. 11.
a. Zach^s marginal benefit schedule shows that the marginal benefit of a lighthouse starts at $90
and declines, and Jacobi marginal benefit starts at $40 and declines? Neither person values the first lighthouse at its marginal cost of $100, so neither person would be willing to pay for a lighthouse acting alone.
b. Zach^s marginal benefit is MBZACH=90-Q, and Jacob's is MBJACOB=40-Q. The marginal benefit
for society as a whole is the sum of the two marginal benefits, or MB=130-2Q (for Q<40), and is equal to Zach9s marginal benefit schedule afterwards (for Q>40). The marginal cost is constant at MC=100, so the intersection of aggregate marginal benefit and marginal cost occurs at a quantity less than 40. Setting MB=MC gives 130-2Q=100, or Q=15. Net benefit can be measured as the area between the demand curve and the marginal benefit of the 15 unit? The net benefit is $112.5 for each person, for a total of $225.
th
11. Each day the private decision of each shepherd would equate private cost with private benefit. Therefore, 7 would show up because then each shepherd would graze four sheep. If the shepherds graze less than four sheep, then they will stay home. The net benefits to society are 0 sheep (the benefit to the seven shepherds is 4 sheep (7x4=28) and the cost to society is 4 sheep per shepherd (7x4=28)). The efficient number of shepherds to show up at the meadow is the number that will maximize social net benefits, which happens where the social marginal benefit equals the social marginal cost? This occurs at four shepherds, where the net social benefits equal 12 sheep (4x7 - 4x4). Access to the meadow is an impure public good? It is rival 一 if one shepherd has access to the meadow, the others have less access. It is, however, non-excludable because it is difficult to keep shepherd from grazing the meadow. 12. Britney^ marginal benefit is MBBRITNEY=12-Z, and Parises is MBPARIS=8-2乙 The marginal benefit for society as a whole is the sum of the two marginal benefits, or MB=20-3Z (for Z<4), and is equal to Britney's marginal benefit schedule afterwards (for Z>4). The marginal cost is constant at MC=16. Setting MB=MC along the first segment gives 20-3Z=16, or Z=4/3, which is the efficient level of snowplowing? Note that if either Britney or Paris had to pay for the entire cost herself, no snowplowing would occur since the marginal cost of $16 exceeds either of their individual marginal benefits from the first unit ($12 or $8). Thus, this is clearly a situation when the private market does not work very well. Also note, however, that if the marginal cost were somewhat lower, (e.g?，MC<8), then it is possible that Paris could credibly free ride, and Britney would provide the efficient allocation. This occurs because if Britney believes that Paris will free ride, Britney provides her optimal allocation, which occurs on the second segment of society's MB curve, which is identical to Britney's MB curve (note that Paris gets zero
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Part 2 - Public Expenditure: Public Goods and Externalities
marginal benefit for Z>4). Since Paris is completely satiated with this good at Z=4, her threat to free ride is credit if Britney provides Z>4. See the graph below.
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Copyright ? 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw?Hill Education ?
Chapter 4 - Public Goods
Chapter 5 — Externalities
Brief Outline
1 ? The Nature of Externalities 2. Graphical Analysis
a. Implications b? Conclusion
3 ? Private Responses
a. Bargaining and the Coase Theorem b. Mergers
c. Social Conventions
4. Public Responses to Externalities: Taxes and Subsidies
a. Taxes b. Subsidies
5. Public Responses to Externalities: Emissions Fees and Cap-and-Trade Programs
a. Emissions Fee b. Cap-and-Trade
c. Emissions Fee versus Cap-and-Trade d? Command-and-Control Regulation
6. The US Response
a. Progress with Incentive-Based Approaches
7. Implications for Income Distributions
a. Who Benefits?
b. Who Bears the Cost?
8. Positive Externalities
a. A Cautionary Note Answers to End-of-Chapter Questions
1. Before passengers were charged for checked bags, they would choose whether to check bags or carry them on based on whether they were willing to trade time for the hassle of dealing with carry-on bags? That is, passengers who valued saving time by not having to deal with baggage claim more than the cost of dealing with carry-on baggage will choose to carry on. The fact that passengers are now charged for checked baggage but not for baggage carried onto the plane will inefficiently allocate overhead space. Passengers will carry on more and bigger bags to save the fee charged, resulting in full overhead luggage containers. Overhead space will go to the first passengers on the plane, rather than being distributed more evenly. Bags checked (without a charge) at the gate forces some who would choose to carry on even without the fee to have to check, which is a loss in efficiency. Those who elect to carry on to avoid the fee, but would rather check their bags, also result in an inefficiency. 2? The Coase theorem suggests that the church and the comedy club could negotiate. If the church possessed the right to the \the comedy club possessed the right to quiet in the building, the church could compensate the club for the noise.
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3. It is the case that a carbon tax would be passed on to the consumer. The tax raises costs to the producer for producing the final good? These increased costs would decrease supply, which will increase the
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