inquizitive 7 - market inefficiencies: externalities & public goods

Place the events in order to explain how a public good comes to be undersupplied.

1st: A team of volunteers spends weekends removing unwanted graffiti in public spaces 2nd: Many merchants and citizens benefit and verbally express their gratitude 3rd: When those who expressed thanks are asked to support the effort with a voluntary financial contribution, only a few do so 4th: Lacking the funds to pay for supplies and transportation, the volunteer team eventually quits

Identify the beneficial effects of copyright law, in terms of addressing the free-rider problem.

Beneficial Effect: - It allows artists to legally prevent others from using their work without their permission and/or payment. - It effectively turns content from a public good into a club good. - It makes certain goods excludable. Not a Beneficial Effect: - It limits competition among artists. - It permits encryption of content

Which of the following would need to be true for Internet access to qualify as a club good? (Club goods = non-rival but excludable)

Connection speed does not depend on number of current users

Enforceable property rights would encourage you to maintain a car in good condition. Which factors contribute to this situation?

Contributing Factor: - The incentive to maintain property. - The incentive to trade with others Not a Contributing Factor: - The incentive to overuse property - The incentive to neglect property

Match each type of good to the corresponding description.

Excludable: - More for one consumer means less for others Private: - paid for and used by owners only Rival: - consumers must pay for Public: - many can use even if few or none pay for it

T/F: Classes at state-run public universities are a public good.

False

Identify the best explanation for why national defense is a public good.

It is not feasible for a nation to defend only selected people who pay for defense against invasion

Place each definition, corrective measure, and example in the appropriate location.

Negative Externalities Definition: costs borne by third parties Corrective measures: taxes/regulation Examples: airports create noise pollution Positive Externalities Definition: benefits received by third parties Corrective measures: subsidies/gov. provision Examples: restored historic buildings enable people to enjoy beautiful architectural details

Complete the table below by placing each example in the correct column.

No externalities: - a homeowner redecorates his/her living room - a consumer buys a sandwich - a college student purchases a computer Negative externalities: - almost every student on campus eats lunch in the campus food court at the same time, causing congestion in the food court - a local paper plant releases foul-smelling but otherwise harmless exhaust - a freight train drives by a dorm and wakes students up every night at 2 a.m. Positive externalities: - fans of the local football team pay for a large statue of the team's mascot - owners of historic homes pay and maintain their homes, which other people enjoy looking at - college freshmen are required to receive vaccinations before classes begin

Match each label to the good it fits best.

Public: the air we breathe Excludable: an amusement park Rival: a free public parking space

What is a main problem with determining the social benefits of a public good like a community fireworks show?

There is no definite way to find out how much people fireworks

Private property rights create incentives. Match each type of incentive to a corresponding example.

Trading with others: - selling a used motor home on Craigslist Protecting property: - keeping a motor home in a locked enclosure Maintaining property: - making regular oil changes on a motor home Conserving property: - using a motor home only for vacation trips, not commutes and errands

Cap and trade policy in effect makes the right to pollute a tradable good.

True

T/F: A negative externality is the same thing as an external cost

True

T/F: All externalities are market failures, but not all market failures are externalities

True

What is the definition of an externality?

a cost or benefit of market activity to an outside party

Fill in the blanks to complete the description of public goods. The market for public goods such as _____ are often subject to _____. Private markets tend to _____ these goods and services because of the _____ problem. One solution to this problem is for _____ to use people's _____ dollars to provide for public goods.

city parks, market failure, undersupply, free-rider, governments, tax

Fill in the blanks to complete the sentence describing ways of encouraging vaccination. In order to maximize everyone's _____ benefits, schools can require proof of vaccination from their students, and _____ often provide _____ to lower the cost of vaccines for _____.

health, governments, subsidies, consumers

Fill in the blanks to complete the statement about how people treat property. When a good belongs to _____, it tends to _____. That is the problem _____ exist to solve. A good belonging to _____ tends to be handled _____.

no one in particular, deliver less value, property rights, a specific person, more efficiently

Fill in the blanks to complete the passage about the tragedy of the commons. In 1968, Garret Hardin wrote about a hypothetical pasture being ruined by _____. The cause was _____ ownership that gave each herder _____ to use the pasture and _____ to exercise restraint. One solution for this kind of situation would be a change in the _____ of the commons.

overuse, common, an incentive, no incentive, property status

Fill in the blanks to complete the passage about common-resource goods. Common-resource goods are _____ and also non-_____. Together with _____, they represent a kind of middle ground between _____ and public goods. A typical example would be any marketable ocean-dwelling fish, since _____ is not practical and fish stocks are _____.

rival, excludable, club goods, private goods, exclusion, depletable

Fill in the blanks to complete the description of common property. Under a system of common property, the _____ leads to _____ and overuse. The phrase tragedy of the commons has been used to describe this type of situation.

the incentive structure, neglect

Which of the following is an example of the tragedy of the commons?

the state of a public restroom on campus at the end of the day

Strictly from an economist's perspective, which of the following is not a problem with cap and trade policy?

High-cost producers are able to buy their way out of the problem rather than having to reform

Which incentives come with owning private property?

Incentive: - the incentive to maintain the condition of the property - the incentive to protect property - the incentive to conserve the property - the incentive to trade the property for something more valuable to the owner in the market Not an Incentive: - the incentive to share the property with others - the incentive to use the property in a manner that is optimal for society

Place each of the four goods listed in the appropriate location in the graph.

Private Goods: - telephone (home landline) Club Goods: - toll road (non-congested) Common-resource Goods: - freeway (rush hour) Public Goods: - non-password protected, public Wi-Fi

Which class of goods generally gives rise to free-rider problems?

Public Goods

Well-defined property rights can lead to the better maintenance and care of a good. In which of the following scenarios would property rights (or lack thereof) lead individuals to fix the problem themselves and for which scenarios would they likely neglect the problem?

Solve the problem: - A homeowner spills tomato sauce on the carpet. - Sports fans celebrate a victory by spraying foam on cars in the parking lot. Neglect the problem: - People throw trash out the window while driving. - Students leave trash on cafeteria tables after lunchtime. - A dog walker does not clean up after his dog on a neighborhood trail.

Imagine that a politician has been asked to support the public good proposals below. In order not to waste money and improve her chances of reelection, she makes her decisions based on a cost-benefit analysis. In each of the situations, should she support or reject the proposal?

Support the Proposal: - installing streetlights in a community where there has been a lot of crime - repairing a broken dam that is a major source of hydroelectric power for a large city Reject the Proposal: - building a very expensive flood control system for an area that floods once every 10,000 years - fixing a pothole along a lightly used street

T/F: The incentive to trade is different from the other three property incentives (to maintain, to protect, to conserve) because the others are about safeguarding value, while trading is about allocating it.

True

A college professor requires students to complete group presentations. She is trying to decide on a grading system that will minimize the free-rider problem. Order the following grading systems from the system that is the least likely to have free-riders to the system that is the most likely.

1st: Group members complete an individual paper on the group topic that counts as a large part on an individual's final project grade 2nd: Group members complete an evaluation of everyone's contribution that counts as a small part of the individual's final project grade 3rd: Group members must assign roles for each part of the project, and all members receive the same final project grade

A series of events takes place when an externality is internalized. Place the events in logical order.

1st: Widespread use of residential woodstoves affects air quality 2nd: New regulations impose emission limits on all new woodstoves 3rd: Makers update woodstove designs 4th: The costs of implementing the design changes are partly borne by makers and partly passed on to the consumers 5th: Air quality improves as the new woodstoves come into use

A new chocolate factory is built in a small town. Residents love the smell that emanates from the chocolate production, and tourists like to buy candy from the factory's retail shop. Tourists can also pay a small fee to take factory tours and taste some of the chocolates. Which of the following statements about the chocolate factory are accurate?

Accurate: - The factory will increase tourist business for owners of shops and restaurants in the town. - The factory should permit the town's visitors center to sell discounted tickets for the chocolate tastings. Inaccurate: - The town government should tax the production of chocolate. - Without government intervention, the factory produces too much chocolate.

Several ways exist to reduce the overuse or neglect of common resources. Match each situation with the correct method for eliminating the tragedy of the commons.

Creating a Club Good: - a fee to play on a golf course - a toll on a congested bridge Gov. Regulation: - increasing fuel-emissions standards for automobiles - a fine for littering in a public park

Which of the following correctly describes a subsidy?

Describes a Subsidy: - a means of internalizing positive externalities - a consumption incentive Does not describe a subsidy: - a tax on producers - a way of making consumption cost-free

What are some circumstances under which the Coase theorem fails to apply?

Fails to Apply: - The externality is smaller than the transactions cost associated with negotiating an agreement. - The two parties are unable to communicate. - Many individuals are impacted. - No applicable property law exists. Applies: - Property law is clear about everyone's position.

T/F: The Great Pacific Garbage Patch is an example of a type of market failure known as the underproduction of a public good.

False

Classify each activity involving common property as neglect, overuse, or neither.

Overuse: - Redwood trees in a park become unhealthy due to heavy foot traffic at their base. - Logging removes timber faster than it can grow back. Neglect: - No one takes care of decorative plants planted in a city park. Both overuse and neglect: - Hundreds of people set off fireworks on the beach at night leaving all of the packaging and spent fireworks on the beach. Neither: - In a national park, all wildfires are immediately put out.

A rancher's cattle is getting into a farmer's wheat. The farmer is displeased because a low-cost barbed wire fence could be constructed to fix this problem. What does the Coase theorem predict could happen, depending on what property law says about the farmer's right to his cropland? More than one choice may be correct.

Prediction by the Coase Theorem: - The farmer pays to build a fence. - The rancher pays to build a fence. Not a Prediction by the Coase Theorem: - The fence does not get built. - The government pays for the fence

Consider the characteristics of each of the goods or services below under normal day-to-day market conditions. Place each good or service onto the correct quadrant of the table.

Private goods: - television sets - bread - coffee Common-resource goods: - the atmosphere - a major river - a community garden Club goods: - broadband internet - water from a drinking fountain in a member only sports gym - cable television Public goods: - aesthetically pleasing architecture - a large sculpture in a city square - national defense

Why does a campground at a national park not necessarily count as a public good?

Reason: - The park may charge a fee for overnight camping. - The number of camping spaces may be limited. Not a Reason: - The park is government owned. - The campground competes with private campgrounds.

What are ways the government can prompt a producer to internalize pollution costs that were previously external?

Way to Prompt a Producer: - pollution taxes - mandated coverage of cleanup costs - pollution abatement regulations Not a Way to Prompt a Producer: - consumer subsidy for clean products