Chapter 11: Public Goods and Common Resources

Highway engineers want to improve a dangerous stretch of highway. They expect that it will reduce the risk of someone dying in an accident from 4.1 percent to 1.5 percent over the life of the highway. If a human life is worth $4.2 million, then the project is worth doing as long as it does not cost more than

$109,200

The idea that "externalities arise because something of value has no price attached to it" is associated with

Both public goods and common resources

What do American drivers on congested roads and Soviet shoppers waiting in line to purchase clothing have in common?

Both the American drivers and the Soviet shoppers are consuming products at prices that do not represent the full costs of the products.

Why do elephants face the threat of extinction while cows do not?

Cattle are owned by ranchers, while elephants are owned by no one.

Suppose that you want to put on a fireworks display in your hometown of 1,000 people this July. The cost of the display is $6,000, and each person values the display at $5. After a month, you have only sold 50 tickets at $5 each. The result is that

Neither you nor the local government should put on the display.

Suppose that the town of Bumbletree is considering hiring an additional police officer. The reduction in crime is estimated to be worth $10 for each of Bumbletree's 5,000 residents. What should the city do?

Hire the police officer if the cost of the new officer is less than $50,000

Which city currently charges drivers a "congestion toll" to drive into the heart of the city's financial, legal, and entertainment district?

London

You are the mayor of a town with 20,000 residents. The head of your economic development agency recently conducted a survey in which the 20,000 residents said that a small public library in the center of town would be worth $40 to each of them. Because the cost to build the library is $500,000, you arrange to have the library built. Everyone in town enjoys the library, but when you asked for donations to pay for the library, you only collected $100,000. You are convinced that

Most residents of the town are probably free-riders at the library.

Reggie owns 3 acres of beautiful wooded land. When Reggie decides to move to be closer to his grandchildren, he donates the land to the state with the understanding that the land will be used as a state park. This state park is large enough that it is not congested. It is an example of a good that is

Neither rival in consumption nor excludable

You are the mayor of a town with 20,000 residents. The head of your economic development agency recently conducted a survey in which the 20,000 residents said that a small public library in the center of town would be worth $40 to each of them. The cost to build the library is $500,000. Which of the following is the most efficient option?

The library should be built and paid for by the town government and paid for with a tax on the residents because all residents would benefit from it but some residents would not donate if they were asked.

When Rick uses a common resource and diminishes other people's enjoyment of it, he creates

an externality

Using a toll to reduce traffic when congestion is greatest is an example of a

corrective tax

A pizza is

excludable and rival in consumption

When goods do not have a price, which of the following primarily ensures that the good is produced?

government

One way to eliminate the Tragedy of the Commons is to

limit access to the commons

A view of a spectacular sunset along a private beach is an example of a

nonrival but excludable good

An FM radio signal is an example of a good that is

nonrival in consumption

When a good is excludable,

people can be prevented from using the good

For most goods in an economy, the signal that guides decisions of buyers and sellers is

price

For private goods allocated in markets,

prices guide the decisions of buyers and sellers and these decisions lead to an efficient allocation of resources.

Most goods in the economy are

private goods

Property rights are well established for

private goods

Because of the free-rider problem:

private markets tend to undersupply public goods

Markets do not ensure that the air we breathe is clean because

property rights are not well established for clean air

A vacation home in Malibu is

rival in consumption and excludable

The U.S. government protects fish, a common resource, by

selling fishing licenses and regulating fish lengths

Too few resources are devoted to the creation of knowledge because profit-seeking firms

tend to free-ride on the knowledge that others have developed

An overcrowded beach is an example of

tragedy of the commons

It is commonly argued that the national defense is a public good. Nevertheless, the weapons used by the U.S. military are produced by private firms. We can conclude that

weapons are rival in consumption and excludable, but national defense is not rival in consumption and not excludable