Question

Lesson 8: Inefficiency and Public Goods

1. Define and give an example of a public good.

2. The first three parts deal with the condition(s) that must be met in order for the efficient amount of a good to be produced. None of the correct answers have anything to do with the presence or absence of government intervention. Instead, tell what condition (an equality between two values) must be the case for the amount produced to be the efficient amount.
a. What condition must be met for the quantity produced of a private good (that is, a good that is rival and excludable) to be efficient? (Hint: This question is answered in Chapter 5.)
b. What condition must be met for the quantity produced of a public good to be efficient?
c. What condition must be met for the quantity used of a common resource to be efficient?
d. Do your answers to parts a, b, and c differ? Explain why the answers differ or, if they are the same, explain why they are the same. Your answer should include the impact of positive and negative externalities.

Answer the following multiple choice questions.

3. A free rider is someone who:
a. pays for a good and then does not consume the good.
b. consumes a good without paying for it.
c. pays the dollar value that he or she places on a given level of provision of a public good.
d. pays less than the maximum amount that he or she is willing to pay for one more unit of the good.

4. The tragedy of the commons arises because ____ exceeds ____ when the resource is used.
a. marginal social benefit; marginal private benefit
b. marginal private benefit; marginal social benefit
c. marginal private benefit; marginal cost
d. marginal social cost; marginal social benefit.

5. One way to overcome the tragedy of the commons is to
a. assign property rights so that someone owns the resource.
b. take away property rights so that no one owns the resource.
c. leave the market alone because the market will reach an equilibrium in which the efficient amount of the resource is used.
d. None of the above answers is correct.

6. Compared to the efficient quantity, in an unregulated market the equilibrium quantity of a public good is ____ the efficient quantity and the equilibrium quantity of a common resource is ____ the efficient quantity.
a. equal to; equal to
b. less than; less than
c. more than; less than
d. less than; more than

Answer 1

Answer 1. Public good is the one doesn't reduce the amount available for other and the individuals cannot be excluded from using it even when they don't pay. So it is both non rival and Non excludable. Example- Street light, fireworks etc.

Answer 2.

1. Efficiency condition for private good:

Marginal private cost= Marginal private benefit

2. Efficiency condition for public good:

Marginal social benefits= Marginal private cost

3. Efficiency condition for common resource good:

Marginal social cost= Marginal social benefit

Answer 3.

b. consumes a good without paying for it.

reason- Free rider is a person who uses the good without actually paying for it, as the good is non rival and non excludable.

Answer 4. marginal social cost; marginal private cost

reason- Tragedy of commons occur when there is overuse and depletion of resources. Due to this, MSC exceeds the MPC

Answer 5. assign property rights so that someone owns the resource

reason- Assigning property rights to common resource helps keep the usage of tge resource under control.

Answer 6. more than, less than

reason- public good is under provided and common resource good is over used.