978-0133872293 Chapter 16 Solution Manual Part 1

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W H AT I S E C O N O M I C S ? 1 3

A n s w e r s t o t h e R e v i e w Q u i z z e s

Page 373

1. List the economic functions of governments.

Governments exist to establish and maintain property rights, to provide nonmarket

2. Describe the political marketplace. Who are the participants, what do they do,

and what is a political equilibrium?

Voters, .rms, politicians, and bureaucrats interact in the political marketplace.

Voters and .rms demand policies. Voters provide votes and/or funds while .rms

supply funds and other help to politicians or political parties that supply the

3. Distinguish among public goods, private goods, common resources, and

natural monopoly goods.

Public goods are nonexcludable and nonrival. As a result, anyone can consume the

good whether or not he or she paid for it and one person’s use of the good does not

decrease the amount available for other people. Private goods are excludable and

4. Why are healthcare and education not public goods and why do governments

play a large role in the markets for these services?

Healthcare and education are not public goods because they are rival and

excludable. But governments play a major role in the market for these services

PUBLIC CHOICES,

PUBLIC GOODS,

AND HEALTHCARE

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Page 377

1. What is the free-rider problem? Why do free riders make the private provision

of a public good ine8cient?

If a .rm were to provide a public good, it would su2er from the free-rider problem,

which arises when non-paying consumers consume the public good without

2. Under what conditions will competition among politicians for votes result in

an e8cient provision of a public good?

Competition in the political marketplace will provide the e8cient quantity of a

3. How do rationally ignorant voters and budget maximizing bureaucrats

prevent the political marketplace from delivering the e8cient quantity of a

public good?

If the marginal bene.t to the voter of becoming well informed about a particular

policy issue is much smaller than the marginal cost of becoming well informed, the

voter is likely to remain rationally ignorant about the policy and the level of any

related public goods provision. The marginal bene.t of providing public goods is

4. Explain why public choices might lead to the overprovision rather than the

underprovision of a public good.

Rational ignorance of voters, combined with lobbying by public goods contractors

and bureaucrats, causes the political equilibrium to provide public goods at a

Page 383

1. What is special about healthcare that makes it a good provided by the

government?

The government provides healthcare services because the marginal social bene.t

of healthcare exceeds the marginal bene.t perceived by its consumers, Consumers

2. Why would the market economy produce too little healthcare?

The markets for healthcare will produce less than the e8cient quantity because

consumers of healthcare take account of only the bene.ts that accrue to them.

W H A T I S E C O N O M I C S ? 1 5

3. How do Canada and the United Kingdom deliver healthcare and what is the

problem left unresolved?

Canada and the United Kingdom provide healthcare using a universal coverage,

single payer system. Everyone is covered by health insurance and the government

4. What are the problem with Medicare and Medicaid?

The government expenditure on Medicare and Medicaid are determined by the

quantity of healthcare demanded, not by a .xed government budget. The scale of

5. What is the problem that Obamacare seeks to solve and how does the

solution work?

The Patient Protection and A2ordable Care Act, or Obamacare, attempts to

overcome the problem of too many people who do not have health insurance. It

seeks to make quality, a2ordable, private health-insurance plans available for

those currently uninsured and to stop insurance companies from denying coverage

A n s w e r s t o t h e S t u d y P l a n P r o b l e m s a n d

A p p l i c a t i o n s

1. Classify each of the following items as excludable, nonexcludable, rival, or

nonrival. Explain your answer.

 A Big Mac

A Big Mac is excludable and rival. It’s excludable because a person must pay for a

 Brooklyn Bridge

 A view of the Statue of Liberty

Viewing the Statue of Liberty is nonexcludable and nonrival. It is nonexcludable

 A hurricane warning system

A hurricane warning system is nonexcludable and nonrival. It is nonexcludable

1 6

2. Classify each of the following items as a public good, a private good, a

natural monopoly good, or a common resource. Explain your answer.

 Highway control services

 Internet service

Internet service is a natural monopoly good. Internet service is excludable because

 Fish in the Atlantic ocean

 UPS courier service

3. For each of the following goods, explain why a free-rider problem arises or

how is it avoided.

 July 4th .reworks display

 Interstate 81 in Virginia

Interstate 81 potentially has a free rider problem. However if the state of Virginia

 Wireless Internet access in hotels

 The public library in your city

The public library has a free rider problem because people can use the library

4. The table sets out the bene.ts that Terri and Sue receive from on-campus

police at night. Suppose that Terri and Sue are the only students on the

campus. Draw a graph to show the marginal social bene.t from the police at

night.

The marginal social bene.t at every

number of police o8cers equals

Police o8cers

night)

Marginal bene.t

o8cer)

1 18 22

2 14 18

3 10 14

4 6 10

5 2 6

W H A T I S E C O N O M I C S ? 1 7

Use the data on a mosquito control program

in the table to work Problems 5 and 6.

5. What quantity of spraying would a

private .rm provide? What is the e8cient quantity of spraying? In a

single-issue election on mosquito spraying, what quantity would the winner

provide?

Mosquito spraying is a public good and subject to free riding. As a result, a private

mosquito would supply no spraying. The e8cient quantity of spraying is 3 square

miles a day, which is the quantity at which marginal social cost equals marginal

6. If the government appoints a bureaucrat to run the program, would mosquito

spraying most likely be underprovided, overprovided, or provided at the

e8cient quantity?

With the bureaucratic department in charge of spraying, mosquito spraying likely

would be overprovided.

The marginal cost of insurance is a

constant $6,000 per family per year.

Marginal social bene.t from insurance

exceeds the willingness and ability to pay

by a constant $4,000 per family per year.

7. With no public health insurance

market, how many families buy

insurance, what is the premium, and

is the coverage e8cient?

With a private and competitive health

insurance market, the price of health

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8. If the government provides healthcare to achieve the e8cient coverage, how

many families are covered and how much must taxpayers pay?

The e8cient quantity of health insurance is 50 million families covered. At this

quantity, the marginal social bene.t equals the marginal bene.t of $2,000 plus

$4,000, or $6,000. Therefore the marginal social bene.t equals the marginal cost,

9. If the government subsidizes private insurers, what subsidy will achieve the

e8cient coverage?

To insure 50 million families, the insurers’ total cost equals $6,000 per family

multiplied by 50 million, or $300 billion. With 50 million families covered, the

demand curve shows that a family is willing to pay $2,000 per policy. Accordingly

families will pay 50 million × $2,000, or $100 billion. Therefore the government

must provide a subsidy of $200 billion to private insurers.

10. If the government gave coverage to everyone what problems would arise in

the related market for healthcare services?

If the government gave everyone coverage, then 70 million families—the quantity

of insurance policies demanded at a price of $0—will be insured. This larger