chapter 9

Question 1

The public sector:

Answer 1

Part of the economy where business activity is owned,
financed and controlled by the state. Goods and services are provided by the state on behalf of the population as a whole.

Question 2

The private sector:

Answer 2

Part of the economy where business activity is owned,

financed and controlled by private individuals.

Question 3

A good is excludable if

Answer 3

people can be prevented from using it when they do

not pay for it.

Question 4

A good is non-excludable if

Answer 4

it is impossible (or extremely costly) to prevent

anyone from benefiting from it.

Question 5

A good is rival in consumption if

Answer 5

one person’s use of it diminishes others’ use.

Question 6

A good is non-rival in consumption if

Answer 6

one person’s use of it does not decrease

the quantity available for someone else.

Question 7

The different kinds of goods

Answer 7

• Private goods are excludable and rival in consumption.
• Public goods are neither excludable nor rival.
• Common resources are goods that are rival but non excludable.
• Club goods are goods that are excludable but non-rival in consumption.

Question 8

They suffer from the free-rider problem

Answer 8

Because public goods are non-excludable,

Question 9

Free rider:

Answer 9

a person who receives the benefit of a good but avoids paying for it

Question 10

Cost-benefit analysis:

Answer 10

a study that compares the costs and benefits of

providing a public good.

Question 11

The marginal social benefit of a unit of a public good

Answer 11

is equal to the sum of the individual marginal benefits that are enjoyed by all consumers of that unit.

Question 12

For private goods, we want to know

Answer 12

we want to know how many units should be produced

to satisfy market demand at a given price (=horizontal summation).

Question 13

For public goods, we want to know

Answer 13

we want to know what is the willingness to pay for each

unit of the good (=vertical summation).

Question 14

Common resources

Answer 14

are not excludable, they are available free or charge to

anyone. They are rival: one person’s use of the common resource reduces other people’s ability to use it.

Question 15

The tragedy of the commons is

Answer 15

the absence of incentives to prevent the overuse and depletion of a commonly owned resource. occurs because social incentives and private incentives differ.

Question 16

Some important common resources

Answer 16

• Clean air and water
• Congested roads
• Fish, whales and other wildlife

Question 17

Merit goods

Answer 17

are goods which can be provided by the market but may be under-consumed as a result of imperfect information about the benefits.

Question 18

Intertemporal choice problem:

Answer 18

decisions made today affect choices facing individuals in the future

Question 19

De-merit goods are

Answer 19

goods that are over-consumed if left to the market

mechanism and which generate both private and social costs which are not taken into account by the decision-maker.