# chapter11 - Problems and Applications 1. When the system is...

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Problems and Applications 1. When the system is congested, each additional rider imposes costs on other riders. For example, when all seats are taken, some people must stand. Or if there isn't any room to stand, some people must wait for a train that isn't as crowded. Increasing the fare during rush hour internalizes this externality. 2. a. Within the dorm room, the showing of a movie is a public good. None of the roommates can be excluded from viewing the movie. Because one roommate’s viewing does not affect the ability of another roommate to view the movie, the good is also nonrival in consumption. b. The roommates should rent three movies because the value of the fourth film (\$6) would be less than the cost (\$8). c. The total cost would be \$8 × 3 = \$24. If the cost were divided evenly among the roommates, each would pay \$6. Orson values three movies at \$18 so his surplus would be \$12. Alfred values three movies at \$12 so his surplus would be \$6. Woody values three movies at \$6, so his surplus would be \$0. Ingmar values three movies at \$3 so his surplus is -\$3. Total surplus among the three roommates would be \$15. d. The costs could be divided up by the roommates based on the benefits they receive. Because Orson values the movies the most, he would pay the greatest share. The problem is that this gives each roommate an incentive to understate the value of the movies to him. e. Because they are going to pay equal shares, Orson has an incentive to tell the truth about the value he places on movies to ensure that the group rents three movies. He values each of the movies more than his cost per movie (\$2). f. The optimal provision of public goods will occur if individuals do not have an incentive to hide their valuation of a good. This means that each individual’s cost cannot be related to his valuation. 3. a. To find the equilibrium number of households that will fish, we set the incomes

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## This note was uploaded on 02/01/2011 for the course ECON 101 taught by Professor Ola during the Spring '10 term at Athens University of Econ and Bus.

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chapter11 - Problems and Applications 1. When the system is...

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