Micro Economics Chapter 17

What type of goods are often called information goods?

artificially scarce goods

Which of these is a public good?

public fireworks

The government can foster the socially optimal use of a common resource by: I. assigning property rights II. imposing a tax on usage III. granting a limited number of tradable permits to use the good

I, II, and III The government can intervene to achieve the socially optimal quantity of a common resource by using the above three approaches, i.e; assigning property rights, imposing a tax on usage and granting a limited number of tradable permits to use the good.

Which example is BEST characterized as a common resource?

a dorm kitchen

Which best represents a tragedy of the commons? The best example is a shopping mall with no shoppers inside. a fire that burns an entire apartment complex. a severe traffic jam on the freeway. a ski resort that has closed due to lack of snow.

a severe traffic jam on the freeway. The tragedy of the commons refers to an issue that occurs when people exploit a shared resource to the extent that demand overwhelms supply and the resource becomes unavailable to few or all.

Which good is the BEST example of a public good?

a system of sirens to warn of approaching storms

Complete the sentences top accurately describe each type of good. Assume that the good is traded in a market without government intervention. a. A market for a private good with no externalities produces an __________________quantity of goods. A private good is__________ in consumption, and is________________. b. A market for an artificially scare good, also known as a club good, produces an ____________ quantity. A club good is _________ in consumption, and is_____________. c. A market for a common resource produces an ____________ quantity. A common resource is ___________ in consumption and is _________. d. A market for a public good produces an___________quantity. A public good is_____________ in consumption and is ________________.

a. efficient , rival, excludable b. inefficient, nonrival, excludable c. inefficient, rival, nonexcludable d. inefficient , nonrival, nonexcludable

The graph depicts the market for digital copies of a popular song. The digital music file is an artificially scarce good. Suppose the producer charges $2.50 per download. What is the resulting deadweight loss?

62.50 The music download is an artificially scarce good because the producer charges a positive price, but the marginal cost of providing the song for download to each customer is $0 because the infrastructure required to provide the song to consumers does not change as the number of downloads increases by 1. The socially optimal level of consumption is 100 downloads per hour given the demand curve. However, the producer, a profit maximizing firm, will exclude some consumers from downloading by charging a price greater than $0 and generating revenue. The download fee of $2.50 results in lower than optimal consumption. At a price per download of $2.50, only 50 units will be purchased. This results in a deadweight loss equal to Deadweight loss=(base× height)2=(100−50)×($2.50)2=50×$2.502=$62.50

Goods for which consumption is inefficiently high are usually:

common resources.

Which is an example of an artificially scarce good?

non-open-source software An artificially scarce good is a good that is excludable but nonrival in consumption.

A good is a public good if it is:

nonexcludable and nonrival in consumption.

A public good, such as street lights, is _____ and _____ in consumption.

nonexcludable; nonrival

Which is the best example of a public good with exclusion? The best example is a public lake. a fireworks display that can be seen miles away. fire protection services offered by the city. satellite radio service.

satellite radio service. The public goods are non-excludable and non-rivalrous, however there are certain public goods such as satellite radio service to exclude users

Which would be the best example of a public good? The best example is Which would be the best example of a public good? The best example is snowplowing the streets. public school. clean water at a public lake. a community park.. public school. clean water at a public lake. a community park.

snowplowing the streets. Snow plowing categorised as a public good or common resource. Once a street is plowed, it will not be excludable

(Table: Marginal Benefit, Cost, and Consumer Surplus of iTunes Download) Use Table: Marginal Benefit, Cost, and Consumer Surplus of iTunes Download. The table shows six consumers' willingness to pay for one iTunes download. If the marginal social cost is constant at _____, then _____ consumers will purchase the good, and the consumer surplus will be _____.

$5.50; two; $14

(Figure: Demand and Marginal Revenue for Google Cloud Service Upgrades) Use Figure: Demand and Marginal Revenue for Google Cloud Service Upgrades. The figure reflects a software upgrade by Google Cloud Services. Google incurred a fixed cost of $10 million in producing the upgrade; the marginal cost of allowing consumers to download the upgrade is zero. To maximize profit, Google will set a price of _____ and produce _____ upgrades.

$50; 125,000

The graph shows the marginal benefit curve for Jose and Sandra, who have identical individual marginal benefit curves for garbage pickups on their street per month. What is the total benefit of 4 pickups per month?

320

What occurs when individuals have no incentive to pay for their own consumption of some good and let someone else pay?

The free-rider problem will manifest itself.

Scenario: Avery and Ethan and the Demand for a Public GoodAvery and Ethan are the only members of a community. They have revealed the marginal private benefits they each receive from a public good whose marginal social benefit is known. In addition, the marginal social cost (MSC) of the public good is known and is constant.

Avery places a higher value on the public good than Ethan.

Which good is a common resource?

sunbathing spots on a public beach

(Figure: Public Goods and Common Resources II) Use Figure: Public Goods and Common Resources II. The figure lists the type of goods that are available for consumption. Label C depicts a good that is either a private good or an artificially scarce good. Such a good is:

excludable

Generally, the amount of public goods available in a society is _____ what is actually desired. a) greater than b) less than c) exactly d) either exactly or greater than

less than Public good can not exclude to those persons who do not want to pay for it. Further, people do not reveal their true demands for public good. Hence, amount of public goods available in a society is less than what is actually desired.

Of the following, which is considered a nonexcludable good?

public beaches

Which good is nonexcludable?

the warning from a weather siren nonexcludable — the supplier cannot prevent consumption of the good by people who do not pay for it. Fire protection is one example: a fire department that puts out fires before they spread protects the whole city,

The table shows the total cost and the total individual benefit of having park rangers in a city park. Assume that the park has 1000 visitors each day and that everyone's preferences are the same.The total social benefit of 3 rangers is _____ dollars.

120,000

Bluefin tuna is a fish that is in high demand from consumers. Overfishing of this species, particularly in the Mediterranean Sea, has led to the strong possibility of extinction. The graph illustrates the marginal social cost (MSC), marginal private cost (MPC), and marginal social benefit (MSB) for a hypothetical representation of the Bluefin tuna market. Use the graph to answer the questions. If this market is unregulated, what will be the equilibrium price and quantity? price: Why is the market equilibrium not socially optimal?

40 5000 MSC is greater than MSB at the market equilibrium. In this case, Bluefin tuna is a common resource. Everyone can catch the tuna, but once it is caught it is not available to other fishermen. It is non‑excludable but rival in consumption. One problem with common resources is their overuse and a failure of competitive markets to yield efficiency. The competitive market equilibrium occurs at the intersection of the supply and demand curves and results in overfishing. Supply and demand intersect at $40 and 5000 lb of Bluefin tuna. The overfishing of Bluefin tuna imposes an external cost on society in the form of the destruction of the species and depleted resources in the future. The external cost is reflected in the MSC curve that is to the left of the supply curve. Notice that at the competitive equilibrium of $40 and 5000 lb, the MSC ($80) is greater than the MSB ($40). Thus, the market equilibrium is not socially optimal. Efficiency occurs when the MSC equals MSB, or the intersection of these curves. Notice that this intersection yields a higher price of $60 and lowers quantity to 3000 lb of tuna.

Which is an example of a free rider? A free-rider would be a person without health insurance who visits an emergency room, since people cannot be turned away. a panhandler who sneaks onto the subway without paying. a neighbor who plants vegetables in her garden and allows others to help themselves to her harvest. your roommates when they ask you for a ride to school but will not help out with gas.

A person without health insurance visiting an emergency room because they can't be turned away Explanation: The free-rider problem occurs when individuals who gains from resources, goods, or services do not pay for them, thus creating an under-provision of those goods or services

What is an efficient way to induce people who use common resources to internalize the costs they impose on others?

Create a system of tradable licenses for the right to use the common resource.

Suppose that a small company is thinking of putting plants in their lobby for employees to view and enjoy. Since the plants are to be viewed by employees, the plants are non-excludable (it is infeasible to move a plant each time a specific individual walks by) and non-rival in consumption (if one worker looks at the plant, it does not prevent another from doing so as well). The company employs three workers: Paul, Greg, and Sharon. The company is thinking about buying up to three plants, and wants to know how much workers would enjoy each plant. For Paul, the first plant has a benefit of $17$17 per day, the second plant has a benefit of $13$13 per day, and the third plant has a benefit of $8$8 per day. For Greg, the first plant has a benefit of $12$12 per day, the second has a benefit of $10$10 per day, and the third has a benefit of $6$6 per day. For Sharon, the first plant has a benefit of $8$8 per day, the second has a benefit of $5$5 per day, and the third has a benefit of $2$2 per day. Given that no one else will see the plants, no one else values the plants in the lobby. What is the marginal social benefit of the first plant? What is the marginal social benefit of the second plant? What is the marginal social benefit of the third plant?

The plants are a public good. Because each person can enjoy the plant once it is in the lobby, the marginal social benefit of each plant is the sum of the value of that plant to Paul, Greg, and Sharon. The marginal social benefit of each plant can be calculated. marginal social benefitpublic good=∑(marginal benefit of that good's consumers) marginal social benefitplant one=$17+$12+$8=$37 marginal social benefitplant two=$13+$10+$5=$28 marginal social benefitplant three=$8+$6+$2=$16

Wikipedia is one of the world's largest and most popular public goods. Students around the world are able to access archives of information for homework, general knowledge, and random wasting of time on the internet. However, Wikipedia is not free to operate, as it requires money to pay its staff and maintain its servers. Free riding is one of the biggest issues for Wikipedia, as millions of people use it daily without incurring any of the costs. Assuming Wikipedia thinks they have too many free riders, which solution would NOT reduce, or offset, the free rider problem?

Wikipedia creates a duplicate website, Wekepedia, with the same content as Wikipedia, but costs $25 a year. Wikipedia would remain free to the public.

Select the best definition of a public good.

a good that is nonexcludable and nonrival in consumption A good is excludable if its consumption can be restricted to those who pay. Without excludability, producers cannot enforce payment and thus, are typically unwilling to supply the good. A good is rival in consumption if one individual consuming it prevents or diminishes another individual's enjoyment of the same good. Without rivalry, the optimal level of consumption is quite high, so goods that are nonrival tend to be under-consumed. A good that is both excludable and rival is a private good, as private markets should be able to efficiently produce and consume them. Examples include sandwiches, cars, and cell phones. In contrast, a good that is nonexcludable and nonrival in consumption is a public good, and most economists believe that governments can improve the efficiency of such a market. Note that the most common example of a public good is national defense, which governments typically supply. Goods that are excludable and nonrival are artificially scarce goods, sometimes called club goods. As you might have guessed, these tend to be underproduced. An example of this type of good is cable television. A good that is nonexcludable and rival in consumption is a common resource, and these typically suffer from overuse. An example is the stock of fish in the seas, which suffers from overfishing. It is important to remember that a good that is paid for with public funds is not necessarily a public good. Both healthcare and postal delivery are excludable and rival, but are often provided or paid for by the government. Lastly, advances in technology can alter how a good is characterized. Television programming used to be only broadcast over the airways and thus nonexcludable, but scrambling technologies and delivery of video content via cable, satellite, and the Internet have altered this situation.

The graph depicts the market for cable where there is one natural monopoly; AC represents average (total) cost, D represents market demand, and MR represents marginal revenue. Assume that the marginal cost is equal to 0. Suppose that before the cable company lays any cable, the government decides to regulate the monopoly by setting the price. What is the lowest price that the government can impose while ensuring that the cable company enters the market? a. $ What will a monopolist charge in the absence of any regulation? b. $

a. 2 b. 4 . a) if Govt regulates the market than break even price will be fixed where P=ATC, earning only normal profit. there are two prices demand curve intersects ATC at $6 and $4. govt will fix at $2 because $6 is very high and above monoply price. b) in the absence of regulation, firm will decide output where MR=MC=0 where price =$4.

The hypothetical city of Hurstville is trying to decide how many city beautification projects should be approved each year. These projects involve planting gardens, commissioning murals, and building fountains. The city has two types of citizens.Type B citizens appreciate beauty more than type A citizens. There is an equal number of each type of citizen. The accopmanying graph depicts each type of citizen's marginal benefit for city beautification projects. The average cost of each project is $400. Use the information in the graph to answer the questions. Use the interactive points to draw the marginal social benefits (MSB) curve. a. What is the optimal quantity of city beautification projects? b. City beautification is a public good because:

a. 3 b. it is nonrival in consumption and nonexcludable.

Consider the table. Number of street lamps 1 2 3 4 5 6 7 Marginal benefit (in $) 30 26 22 18 14 10 6 Suppose that a small town wants to install street lamps, which are nonrival in consumption and nonexcludable. Each of the 25 people in the town value street lamps according to the given schedule. Street lamps each cost $250 to install. Use this information to answer the questions. a. What is the socially optimal number of street lamps? Suppose that 20 of the 25 townspeople decide that they will not help pay for street lamps, and will instead enjoy (for free) the street lamps built by the other five people. b.What is the maximum number of street lamps that will be built by the remaining five people? Suppose the town government decides to build street lamps and pay for the street lamps through taxation. How much should each person be taxed to pay for the optimal number of street lamps if everyone is taxed equally?

a. 6 b. 0 c. 60 How much are the street lamps worth to society? Recall that, since street lamps are public goods, you want to add each person's marginal benefit together for each street lamp. Since the social marginal benefit of the sixth street lamp is equal to the marginal cost of the street lamps ($250), the optimal number of street lamps must be six. When a group of only five townspeople are willing to contribute toward the purchase of lamps, the marginal benefit of the first lamp for the group is only 5×$30=$150. Since this is less than the marginal cost of the lamps, the group will not buy any. Finally, the government will buy six street lamps (the socially optimal amount). When the government buys six street lamps, the total bill is 6×$250=$1,500. Dividing the tax bill equally among townspeople means that each pays payment per individual=tax bill totalnumber of townspeople=$150025=$60

Which of the scenarios are examples of free riding? a. Bob can pay to support his local public radio station, which depends on donations to be as effective as possible. Bob listens to the radio station several hours per day but never donates since he suspects that other people will donate enough to keep the station on the air. b. Drew always buys the lunch special for $5$5 at the restaurant across the street from where he works. If he decided to eat at the restaurant after 3:003:00 p.m., however, he would be unable to get the lunch special, and would instead have to pay $10$10 for the same food. c. Jim is working on a group project for a class in which he wants a high grade. However, since the grades are assigned to the group as a whole and he knows that the other group members will pick up most of the extra work, Jim calls in sick and plays video games on his Dream Station 6464. d. Karl never drives at night, and gets no benefit from street lamps at all. Street lamps are nonexcludable and nonrival in consumption. When the community group tries to collect money to build street lamps, Karl does not donate any money.

a. free-riding b.not free-riding c. free-riding d.not free-riding The first scenario is free-riding because Bob is enjoying a non-excludable resource, which he values but does not pay for. The second scenario is not free riding. Lunch at the restaurant is excludable, meaning that there is no free-rider problem. Drew pays for the lunch. Just because there are different prices for different people does not mean there is free riding. The restaurant is price discriminating, which, in some cases, increases efficiency overcharging a single price. The third scenario is free-riding since Jim gets a grade that he did not pay for via effort toward the group output. Since the group grade is non-excludable, he still gets the grade resulting from the effort of the other group members. Finally, the last scenario is not free-riding because Karl neither values nor uses the good. Karl is no more free-riding than are oak trees that do not help pay for public radio.

Identify the characteristics that describe each good listed below. Note that each good will be described by two characteristics. "Rivalrous" is also referred to as "rival in consumption." Consider only the immediate benefits and costs, not any externalities. a. national defense b. Pay-Per-View cable television c. a Hot Pocket sandwich d. private classroom education e. pajamas f. a unicycle

a. nonexcludable, nonrivalrous b. excludable, nonrivalrous c. excludable, rivalrous d. excludable, rivalrous e. excludable, rivalrous f. excludable, rivalrous An excludable item is one that actors can prevent other actors from using. It is a very useful property for items that you wish to sell, as you can then separate the payers from the non-payers. A unicycle is excludable because you can lock it. Hot Pockets and pajamas are excludable because a seller can keep them locked away until a customer pays for it. Pay-Per-View television can be blocked from nonsubscribers by scrambling it. Classroom education is excludable based on tuition and enrollment to gain credit. Nonexcludable goods are those that are essentially impossible to block other actors from consuming under normal, realistic situations. As long as a person lives within a country, they can enjoy the protection the military provides. Rivalrous items are those in which consumption by one actor decreases the enjoyment of the good by others. As more people use a clean water source, less water is available. A unicycle seats only one person. As one person eats a Hot Pocket, there is one less Hot Pocket available for others to eat. Only one person can wear a pair of pajamas at a time. There is a limited amount of space in a classroom before it gets crowded (although online classes are a different situation). A nonrivalrous good is a good in which one person's consumption does not stop another person from consuming it. For example, all citizens of a country will equally benefit from national defense, regardless of how many citizens there are. Pay-Per-View television shows can be very cheaply descrambled to anyone who wants to pay for that channel without affecting the ability of others to view it.

A____________ is a person who____________ a public good that others____________.

free rider, enjoys, pay for The economic term free rider refers to a person who enjoys the benefits of a good that other people pay for. The free rider problem applies to goods that are nonexcludable, or goods that everyone has access to. For this reason, the term nonexcludable is a characteristic of public goods, i.e., street lighting and national defense. The other defining characteristic of public goods is that they are nonrival, meaning that one person's enjoyment of the good does not prevent, or diminish, the enjoyment of the good by anyone else. Note that Taylor uses the term public goods for nonexcludable nonrival goods; however, some economic authors use the term "pure public goods" to refer to goods that are nonexcludable and nonrival, whereas they use the term "quasi-public goods" to refer to public goods that are semi-nonexcludable and semi-nonrival. Most public goods are quasi-public goods, as there may be ways to exclude people from using them. Yellowstone National Park, for example, charges an entrance fee and is located far away from many people's homes, so many people may not be willing to spend the time and money to visit there.

Because of large up-front R&D (research and development) costs, pharmaceutical companies typically face high fixed costs when developing new drugs. The marginal cost of producing a drug after development is very low, often close to zero. When these companies set their price and output to maximize profit, patients pay a _____ price for a _____ quantity of the drug than is socially optimal.

higher; smaller

If a government is deciding how many trees to plant alongside a city street, this is a _____ decision.

how much

The more one person consumes of a common resource good, the _____ of the good is available to someone else, which is one of the reasons why common resources are subject to _____.

less; overuse

Which of these applies during the production of an on-demand movie but NOT during the broadcast of that movie?

marginal cost

The marginal social benefit of an additional unit of national defense is the sum of the individual marginal benefits of all who enjoy national defense because _____.

national defense is nonrival in consumption

Alley Pond Park in Douglaston, Queens has very few visitors because of its size (relative to, say, Central Park in Manhattan). There is no fee to enter the park, but few people visit it, since other parks have more amenities. This park is _____ in consumption and _____.

nonrival; nonexcludable

After vandals break into Vanessa's book store one night, police investigate the crime. The police investigation is BEST described as a(n):

public good.

Construction of a system of levees and dams to provide flood protection is a(n):

public good.

Although the Canadian government pays for the health care of all qualified citizens and landed immigrants, it does not cover the costs of the health care system itself—for instance, building and managing hospitals or paying the salaries of medical personnel. The Canadian health care system illustrates the _____ provision of _____.

public; a private good

After many years, the small province of Prince Edward Island, in Canada, builds Confederation Bridge, a toll road connecting the island to mainland New Brunswick. It turns out, however, that the bridge is little used. If the community wants the bridge to be used at the socially optimal level, the community should:

set the toll lower. Explanation for a ) to set the toll lower. if community wants the bridge to be used at socially optimal level the community should set the toll lower. if the toll is lower then people will start to use it more frequently than earlier. Explanation for b) to set the toll equal to $1 . as there is no amount measurement given in the question how can you just set the cost $ 1 so it is incorrect. Explantion for c ) set the toll higher . if community will set the toll higher then people will avoid to use that bridge because of its higher toll and it is already less used. Explantion for d) set the toll higher . if community will set the toll higher then people will avoid to use that bridge because of its higher toll and it is already less used.

In the absence of regulation, which good is LEAST likely to be underproduced in a market economy?

tablet computers

What type of producer would use resources to combat the free-rider problem?

the fish and wildlife commission

Dave, a colleague of yours at the local gym, will soon be leaving to open his own gym in Los Angeles. You offer to buy Dave a "going away/good luck" on behalf of all the employees at your gym and tell everyone to drop off donations for the gift in your office. Later, you find that very few people have left donations, so you end up paying for the gift mostly yourself. You have fallen victim to:

the free-rider problem.

(Figure: Marginal Benefit from Consumption of a Public Good) Use Figure: Marginal Benefit from Consumption of a Public Good. Assume that two individuals will share consumption of a public good; each individual has the marginal benefit curve shown in the figure. If the marginal cost of the good is $24, what is the total benefit of the level of the public good that maximizes society's welfare?

$256

The market for which good will not produce the efficient quantity?

video games

Which good is the BEST example of a public good?

measures to improve traffic safety