Chapter 4 Public Finance Answers

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Part 2 – Public Expenditure: Public Goods and Externalities

Chapter 4 – Public Goods
1.
a. Wilderness area is an impure public good – at some point, consumption becomes nonrival; it is, however, nonexcludable.
b. Satellite television is nonrival in consumption, although it is excludable; therefore it is an impure public good.
c. Medical school education is a private good.
d. Television signals are nonrival in consumption and not excludable (when broadcast over the air). Therefore, they are a public good.
e. An automatic teller machine is rival in consumption, at least at peak times. It is also excludable as only those patrons with ATM cards that are accepted by the machine can use the machine. Therefore the ATM is a private good. 2.

a. False. Efficient provision of a public good occurs at the level where total willingness to pay for an additional unit equals the marginal cost of producing the additional unit.
b. False. Due to the free rider problem, it is unlikely that a private business firm could profitably sell a product that is non-excludable. However, recent research reveals that the free rider problem is an empirical question and that we should not take the answer for granted. Public goods may be privately supported through volunteerism, such as when people who attend a fireworks display voluntarily contribute enough to pay for the show.

c. Uncertain. This statement is true if the road is not congested, but when there is heavy traffic, adding another vehicle can interfere with the drivers already using the road.
d. False. There will be more users in larger communities, but all users have access to the quantity that has been provided since the good is nonrival, so there is no reasons larger communities would necessarily have to provide a larger quantity of the nonrival good.

3. 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 MRSTARZAN + MRSJANE = MRT. MRSTARZAN = MRSJANE = 2. But MRT = 3. Therefore, MRSTARZAN + MRSJANE > MRT. To achieve an efficient allocation, Cheetah should patrol more.

Chapter 4 – Public Goods

4. The Search for Extra-Terrestrial Intelligence is a public good because it is nonrival and presumably non-excludable. The government should pay for the research only if the SMB is greater than the SMC.

5. Aircrafts are both rival and excludable goods, so public sector production of aircrafts is not justified on the basis of public goods. If policymakers erroneously assume that the benefits of the mega-jetliner are public, then they would find the efficient level of production by vertically summing demand curves rather than horizontally summing demand curves. This causes the benefits to be significantly overstated and could be used to justify such high costs.

6. It is unlikely that if Pemex were privatized that the situation would lead to a monopoly situation. Comparing oil production to telephone service is not a correct comparison. In the case of the telephone company, there was only one provider of telephone service. In the case of oil production, there would be only one producer in Mexico, but many competitors providing oil from which Mexico could buy. The newly privatized company would have to compete to sell its goods. It would likely become more efficient than the state run company because of this competition.

7. This debate is similar to the debate about private versus public education. Public sector production is often associated with higher costs (for both schools and prisons), but there may be other reasons society would prefer public to private provision. These reasons typically relate to equity considerations. For schools, the main argument is to make sure everyone child has the opportunity for a good education. For prisons, there may be a fundamental conflict between fair and...
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