Public Goods and Public Choices

2. 10 Public Goods and Public Choices CHECKPOINTS

3. Checkpoint 10.1 Checkpoint 10.3 Checkpoint 10.2 Problem 1 Problem 1 Problem 1 Problem 2 Problem 2 Problem 2 Problem 3 Problem 3 Problem 3 Clicker version Problem 4 Problem 4 Problem 4 Problem 5

4. Practice Problem 1 Classify the following services in 2009 for computer owners with an Internet connection as rival, nonrival, excludable, or nonexcludable: eBay A mouse A Twitter page MyEconLab Web site CHECKPOINT 10.1

5. Solution eBay is nonrival and nonexcludable. A mouse is rival and excludable. Twitter is nonrival and you can choose to make your page excludable or nonexcludable. MyEconLab is nonrival and excludable. CHECKPOINT 10.1

6. Practice Problem 2 Classify each of the following items as a public good, a private good, or a common resource: Fire protection The final match of the U.S. Open (tennis) A well-stocked buffet that promises the most bang for your buck The Mississippi River CHECKPOINT 10.1

7. Solution Fire protection is nonrival and nonexcludable, so it is a public good. The final match of the U.S. Open is rival and excludable (a private good) with an external benefit, so it is a mixed good. A well-stocked buffet is rival and excludable, so it is a private good. The Mississippi River is rival and nonexcludable, so it is a common resource. CHECKPOINT 10.1

8. Practice Problem 3 Classify the externality created by the following events as a positive or negative externality and as a consumption externality or a production externality: A huge noisy crowd gathers outside the lecture room Your neighbor grows beautiful flowers on his apartment deck. A fire alarm goes off in the middle of a lecture. Your instructor offers a free tutorial after class. CHECKPOINT 10.1

9. Solution The noise from a huge crowd creates a negative consumption externality. Your neighbor’s beautiful flowers create a positive consumption externality. A fire alarm that goes off in the middle of a lecture creates a negative production externality. Your instructor’s free tutorial is a positive production externality. CHECKPOINT 10.1

10. Practice Problem 4 Wind farm off Cape Cod clears hurdle The nation’s first offshore wind farm with 130 turbines will be built 5 miles off the coast. Wind turbines are noisy, stand 440 feet tall, can be seen from the coast, and will produce power for 75 percent of nearby homes. Source: The New York Times, January 16, 2009 List the externalities that this wind farm might create. CHECKPOINT 10.1

11. Solution The wind farm will create negative externalities: If the noise interferes with marine life. If tourists and Cape Cod residents find that the turbines spoil the scenery. If bird watchers find that sea birds fly into the turbines. CHECKPOINT 10.1

12. Practice Problem 1 For each of the following goods, explain whether there is a free-rider problem. If there is no such problem, how is it avoided? Fire protection A July 4th fireworks display Interstate 80 in rural Wyoming CHECKPOINT 10.2

13. Solution Fire protection is a public good; a July 4th fireworks display is a public good. In both cases, the free-rider problem is avoided by public provision and financing through taxes. Interstate 80 in rural Wyoming is a public good. The public good creates a free-rider problem that is avoided because governments collect various taxes via the tax on gas and the vehicle registration fee.. CHECKPOINT 10.2

14. Practice Problem 2 The table provides information about a mosquito control program. What quantity of spraying would a private mosquito control program provide? What is the efficient quantity of spraying? In a single-issue election on the quantity of spraying, what quantity would the winner of the election provide? CHECKPOINT 10.2

15. Solution A private mosquito control program would provide zero spraying because the free-rider problem would prevail. The efficient quantity is 3 square miles a day—the quantity at which the marginal benefit equals the marginal cost. CHECKPOINT 10.2

16. The winner will provide the efficient quantity: 3 square miles sprayed a day. CHECKPOINT 10.2

17. Practice Problem 3 In the situation described in the table, the government sets up a Department of Mosquito Control and appoints a bureaucrat to run the department. Would the mosquito spraying most likely to be underprovided, overprovided, or provided at the efficient quantity? CHECKPOINT 10.2

18. Solution The mosquito spraying would most likely to be overprovided by the Department of Mosquito Control because the bureau would try to maximize its budget. CHECKPOINT 10.2

19. Study Plan Problem The government sets up a Department of Mosquito Control and appoints a bureaucrat to run the department. The mosquito spraying would most likely be ______. A. overprovided because the bureau would try to maximize its budget B. over- or under-provided depending on the bureau chief’swork ethic C. underprovided because the workers in the bureau will want to do the minimum amount of work D. efficient because public accountability makes a government bureau produce the quantity at which marginal benefit equals marginal cost CHECKPOINT 10.2

20. Practice Problem 4 Vaccination dodgers Doctors struggle to eradicate polio worldwide, but one of their biggest problems is persuading parents to vaccinate their children. The discovery of the vaccine has eliminated polio from Europe and the law requires everyone to be vaccinated. People who refuse to be vaccinated are “free riders.” Source: USA Today, March 12, 2008 Explain why someone who has not opted out on medical or religious grounds and refuses to be vaccinated is a “free rider.” CHECKPOINT 10.2

21. Solution Polio is a serious disease that causes much suffering. If everyone in a neighborhood except one person gets vaccinated, then the unvaccinated person benefits from all the neighbors’ vaccinations. The unvaccinated person is a free rider. CHECKPOINT 10.2

22. Practice Problem 1 The figure shows the marginal private benefit from college education. The marginal cost of a college education is a constant $6,000 a year. The marginal external benefit from a college education is $4,000 per student per year. What is the efficient number of students? If all colleges are private, how many people enroll in college? What is the tuition? CHECKPOINT 10.3

23. Solution The efficient number of students is 50,000 a year—the intersection of the MSB and MC curves. Only 30,000 students a year— the intersection of the MB and MC curves —will enroll. Tuition is $6,000 a year. CHECKPOINT 10.3

24. Practice Problem 2 The figure shows the marginal private benefit from college education. The marginal cost of a college education is a constant $6,000 a year. The marginal external benefit is $4,000 per student per year. If the government decides to provide public colleges, what tuition will these colleges charge to achieve the efficient number of students? How much will taxpayers have to pay? CHECKPOINT 10.3

25. Solution To enroll the efficient number of student (50,000 students), public colleges would charge $2,000 per student. Taxpayers would pay $4,000 per student. CHECKPOINT 10.3

26. Practice Problem 3 The figure shows the marginal private benefit from college education. The marginal cost of a college education is a constant $6,000 a year. The marginal external benefit from a college education is $4,000 per student per year. If the government decides to subsidize private colleges, what subsidy will achieve the efficient number of college students? CHECKPOINT 10.3

27. Solution The efficient number of students is 50,000 a year—the intersection of the MSB and MC curves. The subsidy would be $4,000 per student, which is equal to the marginal external benefit. CHECKPOINT 10.3

28. Practice Problem 4 The figure shows the marginal private benefit from college education. The marginal cost of a college education is a constant $6,000 a year. The marginal external benefit from a college education is $4,000 per student per year. If the government offers vouchers to those who enroll at a college and no subsidy, what is the value of the voucher that will achieve the efficient number of students? CHECKPOINT 10.3

29. Solution The efficient number of students is 50,000 a year—the intersection of the MSB and MC curves. Enrollment will be 50,000 if the tuition is $2,000. The private college tuition is $6,000, so to get 50,000 students to enroll, the value of the voucher will have to be $4,000. CHECKPOINT 10.3

30. Practice Problem 5 Tuition hikes, not loan access, should frighten students Despite the credit crisis, families will not be deprived of access to federal student loans. A hundred banks are not issuing them but 2,000 are. The real danger is a hike in tuition. Often in past recessions, states have cut funding for colleges and tuition has skyrocketed. The Cato Institute says a better policy would be for the states to increase their deficits and maintain the subsidies to colleges. Source: Michael Dannenberg, USA Today, October 22, 2008 (a) If government cuts the subsidy to colleges, why will tuition rise and the number of students enrolled decrease? CHECKPOINT 10.3

31. (b) Why does the Cato Institute say that it’s a better policy for government to maintain the subsidy? Solution A cut in the subsidy will increase the college’s marginal cost. Tuition will rise and the number of students will decrease—a movement up along the demand curve. Because fewer than the efficient number of students will be educated, the Cato Institute says maintaining the subsidy is a better policy. CHECKPOINT 10.3