Chap004 - Chapter 4 Public Goods Chapter 4 Public Goods 1....

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Chapter 4 – Public Goods Chapter 4 – Public Goods 1. a. Wilderness area is an impure public good – at some point, consumption becomes nonrival; it is, however, nonexcludable. b. Water from a municipal water supply is both rival in consumption and excludable. My consumption of water precludes you from consuming the same water, thus it is rival. The municipality can control who consumes water by shutting off the flow to customers, thus it is excludable. This is a useful question for showing that not all publicly owned facilities are public goods. c. Medical school education is a private good. d. Television signals are nonrival in consumption. e. An Internet site is nonrival in consumption (although it is excludable). 2. We assume that Cheetah’s utility does not enter the social welfare function; hence, her allocation of labor supply across activities does not matter. a. The public good is patrol; the private good is fruit. b. Recall that efficiency requires MRS TARZAN + MRS JANE =MRT. MRS TARZAN =MRS JANE =2. But MRT=3. Therefore, MRS TARZAN + MRS JANE MRT. To achieve an efficient allocation, Cheetah should patrol more. 3. A pure public good is nonrival in consumption, thus it is necessary to determine whether or not this is the case with the highway. That is, if the additional cost of another person “consuming” the highway is zero, then it is a public good. So, as long as the highway is not congested, then it can be considered to be a public good. However, adding another motorist to an already congested roadway can cause traffic jams that cost motorists more time to travel the highway, which would represent nonzero costs to having an additional person use the highway. Therefore, the congestion of the roadway determines whether or not we could designate it as a public good. Note that we are assuming throughout that the highway is nonexcludable. To determine whether or not the privatization of the highway is a sensible idea, it is necessary to consider the advantages and disadvantages of such an action. First, if the market structure is such that privatizing the highway would result in a monopolist in control of the highway, then this would be inefficient. Also, it would be difficult for the government to write a complete contract for maintaining the highway, which would also cause inefficiencies that would result from the privatization of the road. However, if the government owns the highway, it might not have the appropriate incentives to maintain it
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Chap004 - Chapter 4 Public Goods Chapter 4 Public Goods 1....

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