Chapter 11: Problems and Applications #1-4

1. Public Goods and Common Resources involve Externalities • A. Externalities associated with public goods positive or negative? • Positive

Examples:

1a. Is free market Q of public goods > or < efficient Q

1b. Are externalities with common resources positive or negative • Negative……

Private value exceeds social value

1b. Examples

• Fish in ocean, environment, congested non-toll roads, congested parks

• Is Free market use of common resources > or < efficient use? • Free market use > efficient use

2. Categorize • Police protection • Natural monopoly – can be excludable and non rival (if not busy) • Can be private – excludable and and rival (if busy) • Can be common good – rival (if busy) but not excludable • Can be public good – non rival, non excludable

• Snow plowing (city streets) • Could be public good (non rival, non excludable) • Could be common resource (non excludable, but rival – if

busy and cant get to all streets)

• Education (public schools vs. private school) • Public education• If live in Solon = Public good • If live outside of Solon but wanted to go to Solon = ….• Natural monopoly (excludable , non rival)

•Rural Roads •Public goods •Non rival, non excludable •Assume rural = not crowded

•City streets• If congested = •Common resources (non excludable, but rival) • If not congested = •Public good

2b- why do you think the government provides items that are not public goods? •May provide positive externalities • Ex: education

3. Charlie watches public TV but no donations•A. he is called • Free Rider •B. how can govt. solve problem • First – what is the problem ? …..•Private market cant provide as much as is socially

desirable b/c of high costs…. • If govt. sees benefit is greater than cost, can provide

subsidies to the station

3c. Can private market solve this problem? •Add commercials •Cable TV•…but change the definition…no longer a public good

….= it is now a….….? •Natural monopoly…..excludable but non rival

4. Firms will not undertake the efficient amount of basic scientific research• A. Explain why…..classify basic research

4b. What policy has US adopted?

4c