ps8_sol0 - Solutions to Practice Problem Set 8 ECON 100C...

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Unformatted text preview: Solutions to Practice Problem Set 8 ECON 100C Perloff Chapter 17 17.7 Are broadcast television and cable television public goods? Is exclusion possible? If either is a public good, why is it privately provided? Broadcast television is nonrival in consumption and nonexcludable, so that it is a pure public good. Cable television is also nonrival, but unlike broadcasts, is excludable and is thus a public good with exclusion or an impure public good. Both are privately provided in the United States, with programming bundled together with advertising to solve the free rider problem for broadcast television, while exclusion allows the provision of cable tv (advertising on cable programming lowers the access price, while other nonrival programming (pay per view, on demand, etc.) is provided entirely by access fees with no commercials). Consumers pay for watching broadcast programs by watching the accompanying ads. 17.16 Guards patrolling a mall protect the malls two stores. The television stores demand curve for guards is strictly greater at all prices than that of the ice-cream parlor. The marginal cost of a guard is $10 per hour. Use a diagram to show the equilibrium, and compare that to the socially optimal equilibrium. Now suppose that the malls owner will provide an $ s-per-hour- per-guard subsidy. Show in your graph the optimal s that leads to the socially optimal outcome for the two stores. In the graph below, the inverse demand curves are drawn so that the quantity demanded at any give price is always greater for the TV store than the ice-cream parlor. In this example, the private market outcome would be for the TV store to pay for 4 guards, and the ice-cream parlor to pay for none. Since guards are a public good, the efficient outcome would be that quantity that equates the sum of the willingness-to-pay to the marginal cost. To find this quantity, we would derive social demand by adding the demand curves vertically. This intersects the marginal cost line at a higher quantity5 in our example. The subsidy that would lead the TV store to pay for the optimal number of guards is the marginal external benefit (willingness to pay for the ice-cream parlor) at the optimal quantity. 17.25 Two tenants of a mall are protected by the guard service, q. The number of guards per hour demanded by the television store is , where is the price of one hour of guard services. The ice-cream stores demand is . What is the social demand for this service? To find the social demand for the service, add the demand curves vertically (you must solve for p first to ensure that you are adding willingness to pay). Individual inverse demands are p = ( a 1 / b 1 ) + (1/ b 1 ) q , and p = ( a 2 / b 2 ) + (1/ b 2 ) q . When added, the resulting ....
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ps8_sol0 - Solutions to Practice Problem Set 8 ECON 100C...

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