Chapter 5 Market failures, public goods and externalities
1. Explain the functions of government in an economy. Why do governments intervene in markets?
2. (a) Using the concept of allocative efficiency, explain the meaning of “market failure” and “externality”. Why is this is a type of market failure?
(b) Explain the difference between the market equilibrium output and the efficient level of output when there are (i) negative externalities and (ii) positive externalities.
(c) Using diagrams provide an example of a negative externality (external cost) and a positive externality (external benefit) (other than the text examples).
(d) What kinds of policies can governments use to correct negative externalities and what kinds to correct positive externalities? Use diagrams to show how the externalities are corrected.
3. (a) Explain the meaning of “rivalry” and “excludability”.
(b) Use these concepts to distinguish between (i) private goods (ii) public goods.
(c) Provide examples of each type of good.
(d) Explain how governments reallocate resources to correct for the market’s failure to produce public goods.
(e) What is the free rider problem?
(g) Is U.S. border patrol a public good or a private good? Why? How about satellite TV? Explain.
4. Use the distinction between the characteristics of private and public goods to determine whether the following should be produced through the market system or provided by government: (a) French fries, (b) airport screening, (c) court systems, (d) mail delivery, and (e) medical care. State why you answered as you did in each case.
5. Explain the difference between progressive, proportionate and regressive tax systems.
6. Suppose in Fiscalville there is no tax on the first $10,000 of income, but a 20% tax on earning between $10,000 and $20,000 and a 30% tax on income between $20,000 and $30,000. Any income above $30,000 is taxed at 40%. If your income is $50,000,