7) Some resources are private and others are common. Define a common resource, explain the
definition, and provide an example of a private resource and a common resource.
8) Explain the difference between a negative production externality and a negative consumption
externality.
9) Explain the difference between a positive production externality and a positive consumption
externality.
10.7 Essay: Public Goods and the Free-Rider Problem
1) What is the free-rider problem and with what is it associated?
2) What is the free-rider problem? What results from the free-rider problem? What is a solution
to the free-rider problem?
3) “The principle of increasing marginal cost does not apply to public goods.” Is this statement
correct or not?
4) Protection of rivers in Idaho is a public good. If the marginal cost of protecting rivers in Idaho
exceeds the marginal benefit of river protection, is there more than, less than, or the efficient
amount of river protection taking place?
5) How is the efficient quantity of public goods determined?
6) How does the principle of minimum differentiation relate to the free-rider problem?
7) Why isn’t national defense provided by free markets?
8) What is rational ignorance?
9) Why is watching sports more important to many prospective voters than watching the news?
In your answer, mention the role played by rational ignorance and the cost of gathering
information.
10) Under what conditions will the political process provide an inefficient amount of a public
good?
11) The table above shows the marginal benefit that arises from providing police protection in an
economy of two people, Paul and Art.
a. Construct a table of the economy’s marginal benefit from providing police protection.
b. What is the economy’s marginal benefit from having 3 police cars on duty?
12) Ten homeowners live around Lake Alice. Unfortunately, the lake is contaminated with
various chemicals and the level of contamination is currently 20 parts per million. All the
homeowners benefit equally if the level of contamination is reduced. The table above gives the
marginal cost and marginal benefit for removing the contaminants from the lake.
a. What will be the parts per million if the homeowners alone are in charge of reducing the
contaminants?
b. What is the efficient amount of contamination?
13) The table above provides information about the marginal cost and marginal benefit of
streetlights, which are a public good.
a. What quantity would a private company provide? Why?
b. What is the efficient quantity?
1) Does the existence of the University of Oklahoma affect citizens who do not attend the
University?
2) Explain the difference between marginal social benefit and marginal external benefit.
3) “Education in elementary and high schools has external benefits because families who have a
lot of children do not pay any more than families without children.” Is this statement correct or
incorrect? Explain your answer.
4) Describe some of the external benefits associated with education. What can government do to
encourage production of the efficient amount of education?
5) Does inoculation against chicken pox have both private and external benefits?
6) “External benefits lead to overproduction so that more than the efficient quantity is produced.”
Is the previous statement true or false?
7) Why does the existence of an external benefit lead to the production of less than the efficient
quantity?
8) Why does government provide educational opportunities in the form of vouchers, subsidies,
and public provision?
9) A private subsidy has what effect on the amount of a good or service produced? Is a subsidy
an appropriate policy to offset the inefficiency from an external cost or an external benefit?
10) Explain the process by which a private subsidy corrects an external benefit.
11) The table above gives the marginal social cost (which equals the price), marginal private
benefit, and marginal social benefit of students attending Diablo Valley College (DVC) in
Concord, California.
a. When 4,500 students attend DVC, what does the marginal external benefit equal?
b. If the market is competitive and left without government intervention, what is the quantity of
students that will attend DVC and what will be the price of a course?
c. What is the efficient quantity of students attending DVC?
d. If the government can set the price per course, in order to have the efficient quantity of
students attending DVC, what should the government set as the price?
12) The figure above shows the market for polio vaccination in Africa. Polio vaccination confers
an external benefit because one person’s vaccination makes it less likely that other people will
catch polio.
a. If the market is competitive and left unregulated, how many doses of vaccine will be
administered?
b. If the Melinda and Bill Gates Foundation underwrites the cost of the vaccine by paying for a
large fraction of the preparation and delivery cost, what will happen to the number of doses
administered? Why?
13) The figure above shows the market for education. Education has an external benefit.
a. If the market is competitive and left unregulated, how many students will be enrolled per
year?
b. What is the efficient number of students?
c. In the figure, show the effect of a government subsidy that moves the market to the efficient
number of students. What is the amount of the subsidy and what tuition must the students pay?
14) When young students are hungry, they can be disruptive and inattentive in class. Thus,
providing lunch to students has external benefits. The figure above represents the market for
school lunches before and after government vouchers are issued.
a. What is the unregulated private market equilibrium?
b. What is the efficient quantity of lunches?
c. What is the amount of the voucher necessary to move the economy to the efficient number of
lunches?
d. When vouchers are used, what is the dollar price of the lunch that suppliers receive and what
is the dollar price that consumers pay when the voucher is used?