EOC17: End of Chapter Problems - Ch. 17: Public Goods and Common Resources

In many planned communities, various aspects of community living are subject to regulation by a homeowners' association. These rules can regulate house architecture; require snow removal from sidewalks; exclude outdoor equipment, such as backyard swimming pools; require appropriate conduct in shared spaces, such as the community clubhouse; and so on. Suppose there has been some conflict in one such community because some homeowners feel that some of the regulations mentioned above are overly intrusive. You have been called in to mediate. Using what you have learned about public goods and common resources, how would you decide what types of regulations are warranted, and what types are not? Regulations can increase efficiency in the provision of which of the following types of goods?

Public goods; Artifically scarce goods; Common resources

The accompanying table shows Tanisha's and Ari's individual marginal benefit of different amounts of street cleanings per month. Suppose that the marginal cost of street cleanings is constant at $9 each. Quantity of streetcleanings per monthTanisha'sindividualmarginal benefitAri'sindividualmarginal benefit0----1$10$8264321 a. If Tanisha had to pay for street cleaning on her own, how many street cleanings would there be? b. Calculate the marginal social benefit of street cleaning. What is the optimal number of street cleanings? c. Consider the optimal number of street cleanings. The last street cleaning of the optimal number of street cleanings costs $9. Is Tanisha willing to pay for that last cleaning on her own? Is Ari willing to pay for that last cleaning on his own? Tanisha _____________ willing to pay. Ari _____________ willing to pay.

a. 1 street cleanings b. 2 street cleanings c. is not; is not

In developing a vaccine for avirus, a pharmaceutical company incurs a very high fixed cost. The marginal cost of delivering the vaccine to patients, however, is negligible (consider it to be equal to zero). The pharmaceutical company holds the exclusive patent to the vaccine. You are a regulator who must decide what price the pharmaceutical company is allowed to charge. a. In the diagram, place point PM on the y-axis to show the price of the vaccine if the company is unregulated. Also, place point PE to show the efficient price of the vaccine. Shade the area to show the deadweight loss (DWL) that arises from the price PM. b. Now place point P* on the y-axis to show the lowest price that the regulator can enforce that would still induce the pharmaceutical company to develop the vaccine. Shade the area representing the deadweight loss (DWL-P*) that arises from this price. c. Given the fixed cost curve in the diagram, how could you combine price regulation with a subsidy to the company to achieve the efficient output at the lowest cost to the government?

a. PM Point: (0, 90) PE Point (0, 0) DWL: (9, 0); (9, 90); (18, 0) b. P* Point: (0, 60) DWL-P*: (12, 0); (12, 60); (18, 0) c. Require the company to set the price at the MC, and subisidize production at $30 per unit.

Prior to 2003, the city of London was often one big parking lot. Traffic jams were common, and it could take hours to travel a couple of miles. Each additional commuter contributed to the congestion, which can be measured by the total number of cars on London roads. Although each commuter suffered by spending valuable time in traffic, none of them paid for the inconvenience they caused others. The total cost of travel includes the opportunity cost of time spent in traffic and any fees levied by London authorities. The graph illustrates the overuse of London roads, assuming that there is no fee to enter London in a vehicle and that roads are a common resource. a. In February 2003, the city of London began charging a £5 congestion fee on all vehicles traveling in central London. Move the endpoints of the supply curve, S£5 fee, to illustrate the effects of this congestion charge. b. The £5 congestion fee, however, turned out to be too low relative to what would be efficient. In January 2011, the congestion fee, therefore, rose again, now to £9. Assuming the latter adjustment is efficient—i.e., that it brings the marginal private cost into line with the marginal social cost—move the endpoints of the marginal social cost curve, MSC, to illustrate the effects of this congestion charge. Place the the new equilibrium point, O, at the social optimum.

a. S£5 fee Line: (2, 6) - (16, 13) b. Point O: (6, 12) MSC: (0, 9) - (14, 16)

Americans have become passionate consumers of the Asian hot sauce Sriracha. Sriracha is produced by Huy Fong Foods in Irwindale, California. Each year the company processes over 100 million pounds of chili peppers to make their delectable sauce. But roasting all of those chili peppers has had an unintended consequence: pollution. Recently, local residents began complaining about a pungent odor from the plant that they believed led to heartburn, nosebleeds, and coughing. The hypothetical table shows the estimated marginal social benefit (MSB) and marginal social cost (MSC) of pollution that arises from odor emissions. The marginal private benefit (MPB) is $16. Quantity ofodor emissions(thousands of odorunits)Marginal socialbenefit($ per odor unit)Marginal socialcost($ per odor unit)0$80$0172826416356244483254040632487245681664987210080 a. How can the pollution that results from Sriracha production have a marginal social benefit? b. Graph the marginal social cost and marginal social benefit of odor. c. What is the market-determined quantity of odor? d. What is the social gain from reducing the market determined quantity of odor by one odor unit?

a. The odor arises from the production of hot sauce, which people like. b. Graph: the table c. 8,000 odor units d. $48

The accompanying table shows six consumers' willingness to pay (his or her individual marginal benefit) to download a Jay-Z album. The marginal cost of making the file accessible to one additional consumer is constant, at zero. ConsumerIndividual marginal benefitAdriana$2Bhagesh15Chizuko1Denzel10Emma5Frank4 a. What would be the efficient price to charge for a download of the file? efficient price: $ ____________ b. All six consumers can download the file for free from a file-sharing service, Pantster. Which consumers will download the file? What will be the total consumer surplus to those consumers? consumer surplus: $ ____________ c. Pantster is shut down for copyright law infringement. To download the file, consumers must now pay $4.99 at a commercial music site. Which consumers will download the file? What will be the total consumer surplus to those consumers? consumer surplus: $ ____________ How much producer surplus accrues to the commercial music site? producer surplus: $ ____________ What is the total surplus? total surplus: $ ____________ What is the deadweight loss from the new pricing policy? deadweight loss: $ ____________

a. efficient price: $0 b. Bhagesh, Frank, Denzel, Emma, Chizuko, Adriana consumer surplus: $37 c. Bhagesh, Denzel, Emma consumer surplus: $15.03 producer surplus: $14.97 total surplus: $30 deadweight loss: $7

Butchart Gardens is a very large garden in Victoria, British Columbia, renowned for its beautiful plants. It is so large that it could hold many times more visitors than currently visit it. The garden charges an admission fee of $30. At this price, 1,000 people visit the garden each day. If admission were free, 2,000 people would visit each day. The marginal cost of an additional visitor is $0. a. Visits to Butchart Gardens are _____________ and _____________ in consumption. They are thus _______________ good. b. Use the two price and quantity combinations to draw a demand curve in the accompanying diagram, using line D. Assume that demand is linear (a straight line). Place point E$30 to show the situation when Butchart Gardens charges an admission fee of $30. Place point E$0 to show the situation when Butchart Gardens charges no admission fee. Finally, shade the area representing the deadweight loss from charging a $30 admission fee. c. Charging a $30 admission fee is inefficient, since at that level, _____________ .

a. excludable; nonrival; an artifically scarce b. D-Line: (0, 60) - (2000, 0) Point E $0: (2000, 0) Point E $30: (1000, 30) DWL: (1000, 0); (1000, 30); (2000, 0) c. P > MC

Anyone with a radio receiver can listen to public radio, which is funded largely by donations. a. Public radio is _____________ and _____________ in consumption. It is therefore _____________ . b. The government ____________ support public radio because _____________ . c. To finance itself, public radio decides to transmit only to satellite radios, for which users must pay a fee. In this scenario, public radio is _____________ . The number of listeners will be _____________ , since the price is _____________ .

a. nonexcludable; nonrival; a public good b. should; private markets result in an inefficiently low level of public goods c. an artificially scarce good; inefficiently low; above marginal cost

The village of Upper Bigglesworth has a village "commons," a piece of land on which each villager, by law, is free to graze his or her cows. Use of the commons is measured in units of the number of cows grazing on it. Assume that the marginal private cost curve of cow-grazing on the commons is upward-sloping (due, say, to more time spent herding). There is also a marginal social cost curve of cow-grazing on the commons: each additional cow grazed means less grass available for others, and the damage done by overgrazing of the commons increases as the number of cows grazing increases. Finally, assume that the private benefit to the villagers of each additional cow grazing on the commons declines as more cows graze, since each additional cow has less grass to eat than the previous one. a. The commons is ____________ and ____________ in consumption. It is thus a ____________ . b. Draw a diagram showing the marginal social cost (MSC), the marginal private cost (MPC), and the marginal private benefit (MPB) of cow-grazing on the commons. Use point M to show the quantity of cows grazing in the absence of government intervention and point O to show to the optimal quantity. c. The villagers hire you to tell them how to achieve an efficient use of the commons. You tell them that there are three possibilities: a Pigouvian tax, the assignment of property rights over the commons, and a system of tradable licenses for the right to graze a cow. Explain how each one of these options would lead to an efficient use of the commons. In the assignment of property rights, assume that one person is assigned the rights to the commons and the rights to all the cows. In the diagram, place the line P-tax to show the Pigouvian tax. The Pigouvian tax would equal the ____________ grazing level and be ____________ . Assigning villagers rights to the commons and the cows could result in the optimal outcome because the rights holder would ____________ . Tradable licenses could lead to an efficient outcome, provided the number of cows that villagers are licensed to graze is set ____________ .

a. nonexcludable; rival; a common resource b. Point O: (8, 11) MSC: (2, 7) - (14, 16) MPC: (2, 4) - (14, 9) MPB: (2, 17) - (16.5, 3.5) P-Tax: (8, 6.5) - (8, 11.5) Point O: (8, 11.5) Point M: (11.5, 8) c. external cost at the socially optimal; added to the marginal private cost both bear the costs and reap the benefits of grazing at the quantity at which the marginal social cost equals the marginal private benefit

An economist gives the following advice to a museum director: "You should introduce 'peak pricing.' At times when the museum has few visitors, you should admit visitors for free. And at times when the museum has many visitors, you should charge a higher admission fee." a. When the museum is quiet, it is _____________ in consumption and _____________ . The museum is, therefore, _____________ . The efficient entry admission fee is _____________ , as that would equal the _____________ . b. When the museum is busy, it is _____________ in consumption and _____________ . The busy museum is, therefore, _____________ . The efficient price to charge visitors during that time is _____________ . as that would equal the _____________ .

a. nonrival; excludable; an artificially scarce good; zero; marginal cost b. rival; excludable; a private good; the external cost at the efficient number of visitors; marginal cost

The government is involved in providing many goods and services. For each of the goods or services listed, determine whether it is rival or nonrival in consumption and whether it is excludable or nonexcludable. What type of good is it? Without government involvement, would the quantity provided be efficient, inefficiently low, or inefficiently high? a. Street signs Street signs are _____________ in consumption and _____________ . Street signs are therefore a _____________ good, and the market output would be _____________ . b. Amtrak rail service An Amtrak ticket is _____________ in consumption and _____________ . Amtrak is therefore a _____________ good, and the market output would be _____________ . c. Regulations limiting pollution Regulations limiting pollution are _____________ in consumption and _____________ . Regulations limiting pollution are therefore a _____________ good, and the market output would be _____________ . d. A congested interstate highway without tolls A highway like this is _____________ in consumption and _____________ . The highway is therefore a _____________ good, and the market output would be _____________ . e. A lighthouse on the coast A lighthouse is _____________ in consumption and _____________ . The lighthouse is therefore a _____________ good, and the market output would be _____________ .

a. nonrival; nonexcludable; public good; inefficiently low b. rival; excludable; private good; inefficiently low c. nonrival; nonexcludable; public good; inefficiently low d. rival; nonexcludable; common resource; inefficiently low e. nonrival; nonexcludable; public; inefficiently low

Software has historically been an artificially scarce good—it is nonrival because the cost of replication is negligible once the investment to write the code is made, but software companies make it excludable by charging for user licenses. But then open-source software emerged, most of which is free to download and can be modified and maintained by anyone. Consider what free-rider problem might arise from the development of open-source software. a. A free-rider problem is created because individual developers may write ____________ and let others "pay" to ____________ . b. Companies like Microsoft and Adobe could make ____________ profits if their product is substandard. Thus, company management enforces ____________ measures that mitigate the free-rider problem.

a. poor code; fix their mistakes b. lower; quality control c. E MKT Point: Above intersection x-axis & MR on D-Line E OPT Point: Intercept D-Line & x-axis MC Line: x-axis

Your economics professor assigns a group project for the course. To combat the free-rider problem to which such an assignment might lead, the instructor asks you to evaluate the contributions of your peers in a confidential report. Will this evaluation have the desired effects? A student's grade depends on the quality of ____________ work. If ____________ minimizes the effort put in, the impact on the grade will be small. This gives each member of the group an incentive to ____________ . The result is that the project will be of ____________ quality than it otherwise might be. The confidential evaluation could mitigate the ____________ problem if there is a credible threat that ____________ .

the entire group's; one student; shirk; lower; free-rider; shirking will result in a lower grade for the shirker than for non-shirkers