Online Learning Center

	Economics 14/e McConnell
Online Learning Center

30-1 Based on the following three individual demand schedules for a particular good and assuming these three people are the only ones in the society determine (a) the market demand schedule on the assumption that the good is a private good and (b) the collective demand schedule on the assumption that the good is a public good. Explain the differences if any in your schedules.

30-2 Use your demand schedule for a public good determined in question 1 and the following supply schedule to ascertain the optimal quantity of this public good. Why is this the optimal quantity?

30-3 The following table shows the total costs and total benefits in billions for four different antipollution programs of increasing scope. Which program should be undertaken? Why?

30-4 Why are spillover costs and spillover benefits also called negative and positive externalities? Show graphically how a tax can correct for a spillover cost and a subsidy to producers can correct for a spillover benefit. How does a subsidy to consumers differ from a subsidy to producers in correcting for a spillover benefit?

30-7 Explain the following statement using the MB curve in Figure 30-6 to illustrate: "The optimal amount of pollution abatement for some substances say water from storm drains is very low; the optimal amount of abatement for other substances say cyanide poison is close to 100 percent."

30-13 Place an M beside those items in the following list which describe a moral hazard problem and an A beside those which describe an adverse selection problem.

30-1 (a) Private good top to bottom: P = $8 Q = 1; P = $7 Q = 2; P = $6 Q = 4; P = $5 Q = 7; P = $4 Q = 10; P = $3 Q = 13; P = $2 Q = 16; P = $1 Q = 19. (b) Public good top to bottom: P = $19 Q = l; P = $16 Q = 2; P = $13 Q = 3; P = $10 Q = 4; P = $7 Q = 5; P = $4 Q = 6; P = $2 Q = 7; P = $1 Q = 8. The first schedule represents a horizontal summation of the individual demand curves; the second schedule represents a vertical summation of these curves. The market demand curve for the private good will determine -- in combination with market supply -- an actual price-quantity outcome in the marketplace. Because potential buyers of public goods do not reveal their individual preferences in the market the collective demand curve for the public good is hypothetical or needs to be determined through "willingness to pay" studies.
30-2 Optimal quantity = 4. It is optimal because at 4 units the collective willingness to pay for the final unit of the good (= $10) matches the marginal cost of production (= $10).
30-3 Program B since the marginal benefit no longer exceeds marginal cost for programs which are larger in scope. Plan B is where net benefits -- the excess of total benefits over total costs -- are maximized.
30-4 Spillover costs are called negative externalities because they are external to the participants in the transaction and reduce the utility of affected third parties (thus "negative"). Spillover benefits are called positive externalities because they are external to the participants in the transaction and increase the utility of affected third parties (thus "positive"). See Figures 30-3 and 30-4. Compare (b) and (c) in Figure 30-4.
30-7 Reducing water flow from storm drains has a low marginal benefit meaning the MB curve would be located far to the left of where it is in the text diagram. It will intersect the MC curve at a low amount of pollution abatement indicating the optimal amount of pollution abatement (where MB = MC) is low. Any cyanide in public water sources could be deadly. Therefore the marginal benefit of reducing cyanide is extremely high and the MB curve in the figure would be located to the extreme right where it would intersect the MC curve at or near 100 percent.
30-13 Moral hazard problem: (b) and (d). Adverse selection problem: (a) (c) and (e).

Chapter 30 - Government And Market Failure: Public Goods, Externalities, And Information Problems