Chapter 11 - Chapter11 11 PUBLICGOODSAND COMMONRESOURCES...

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Public Goods and Common Resources SOLUTIONS TO TEXT PROBLEMS: Quick Quizzes 1. Public goods are goods that are neither excludable nor rival.  Examples include national defense,  knowledge, and uncongested nontoll roads.  Common resources are goods that are rival but not  excludable.  Examples include fish in the ocean, the environment, and congested nontoll roads. 2. The free-rider problem occurs when people receive the benefits of a good but avoid paying for it.  The free-rider problem induces the government to provide public goods because if the  government uses tax revenue to provide the good, everyone pays for it and everyone enjoys its  benefits. The government should decide whether to provide a public good by comparing the  good’s costs to its benefits; if the benefits exceed the costs, society is better off. 3. Governments try to limit the use of common resources because one person’s use of the resource  diminishes others’ use of it, so there is a negative externality which leads people to use common  resources excessively. Questions for Review 1. An excludable good is one that people can be prevented from using.  A rival good is one for  which one person's use of it diminishes another person's enjoyment of it.  Pizza is both  excludable, since a pizza producer can prevent someone from eating it who doesn't pay for it,  and rival, since when one person eats it, no one else can eat it. 2. A public good is a good that is neither excludable nor rival.  An example is national defense,  which protects the entire nation.  No one can be prevented from enjoying the benefits of it, so it is  not excludable, and an additional person who benefits from it does not diminish the value of it to  others, so it is not rival.  The private market will not supply the good, since no one would pay for it  because they cannot be excluded from enjoying it if they don't pay for it. 215 PUBLIC GOODS AND  COMMON RESOURCES 11
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216   Chapter 11/Public Goods and Common Resources 3. Cost-benefit analysis is a study that compares the costs and benefits to society of providing a  public good.  It is important because the government needs to know which public goods people  value most highly and which have benefits that exceed the costs of supplying them.  It is hard to  do because quantifying the benefits is difficult to do from a questionnaire and because  respondents have little incentive to tell the truth.
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