Chapter 6

Question 1

What kind of goods are there?

1.
2.
3.
4.

Answer 1

• private goods, excludable and rival
• club goods, excludable and non-rival
• common resources, non-excludable and rival
• public goods, non-excludable and non-rival

Question 2

What is the Free Rider Problem?

1.
2.

Answer 2

• An individual not paying for a goods because it is nonexcludable
• prevents private markets from supplying public goods

Question 3

How can the Free Rider Problem be solved?

1.
2.

Answer 3

• government can decide to provide the public good if the total benefits exceed the costs
• government can make everyone better off by providing the public good and paying for it with tax reveniue

Question 4

Cost-benefit analysis…

Answer 4

… evaluate the economic costs and benefits of the provision of public goods

Question 5

How can we decide whether a public good should be provided?

Answer 5

• the total cost of providing and maintaining the goods must be balanced against the overall benefit of all beneficiaries
• in the absence of prices, the estimation of costs and benefits is very difficult

Question 6

Governments should continue to provide a public good up to the point….

Answer 6

…where the marginal benefit gained from an extra unit provided is equal to the marginal cost of providing that extra unit

MSB=MC

Question 7

What is the tradegy of the commons?

Answer 7

• a parable that illustrates why common resources get used more than is desirable from the standpoint of society as a whole
• common resources tend to be used excessively when individuals are not charged for their usage
• similar to a negtive externality

Question 8

how can we solve the tradegy of the commons?

1.
2.
3.

Answer 8

• private ownership - defined by government
• government regulation - e.g., fishing limits
• tax on use

Question 9

What are Merit goods?

1.
2.

Answer 9

• merit goods arise because consumers may have imperfect information about the benefits of these goods and are not able to value them appropirately as a result
• can be provided by the market but may be under-consumed as a result

Question 10

What is the intertemporal choice?

Answer 10

• decisions made today can affect choices facing individuals in the future

Question 11

What are the key benefits of merit goods?

1.
2.

Answer 11

• private benefits of educsation include career prospects - difficult to calculate private education benefits
• social benefits include better stock of human capital - individuals dont take account of social benefits when making decisions about their education, so left to the private market education would be under-consumed

Question 12

What are De-Merit goods?

Answer 12

• are over-consumed if left to the market mechanism
• generate both private and social costs, e.g. alcohol (antisocial behaviour, taxing alcohol by govern.)