Chapter 15/The Shortcomings of Free Markets
CHAPTER 15
THE SHORTCOMINGS OF FREE MARKETS
TEST YOURSELF
1. What is the opportunity cost to society of a 100-mile truck trip? Why may the price of
the gasoline used by the truck not adequately represent that opportunity cost?
The opportunity cost to society of a trip by a truck is the goods and services that would
have been available had the trip not been made. Some of these are forgone because the
2. Suppose that because of a new disease that attacks coffee plants, far more labor and
other inputs are required to harvest a pound of coffee than before. How may that
change affect the efficient allocation of resources between tea and coffee? How would
the prices of coffee and tea react in a free market?
The disease raises the opportunity cost of a pound of coffee. It will be efficient for people
3. Give some examples of goods whose production causes detrimental externalities and
some examples of goods whose production creates beneficial externalities.
Examples of goods causing detrimental externalities: substances in spray cans the use of
4. Compare cleaning a dormitory room with cleaning the atmosphere of a city. Which is a
public good and which is a private good? Why?
Cleaning a dorm room is a private good, while cleaning the atmosphere is a public good.
In the former case, the resident can be excluded from access to the service and use of the
5. (More difficult) A firm holds a patent that is estimated to be worth $20 million. The
patent is repeatedly challenged in the courts by a large number of (money-seeking)
firms, each hoping to grab away the patent. If anyone is free to challenge the patent so
that there is free entry into the litigation process, how much will end up being spent in
the legal battles? (Hint: Under perfect competition, should firms expect to earn any
economic profit?)
Chapter 15/The Shortcomings of Free Markets
DISCUSSION QUESTIONS
1. Give some other examples of public goods. In each case, explain why additional users do
not deplete the good and why it is difficult to exclude people from using it.
There are many examples. A country’s diplomatic service is a public good. It is intended
to produce friendly relations with other countries. If it does so, no citizen of the
2. Think about the goods and services that your local government provides. Which are
“public goods” as economists use the term?
Public goods provided by a local government include police protection and road
3. Explain why the services of a lighthouse are sometimes used as an example of a public
good.
4. Explain why education is not a very satisfactory example of a public good.
Education has some aspects of a public good because some of the value of a person’s
education accrues to that person’s fellow citizens who find their lives improved by living
5. In recent decades, college tuition costs have risen more rapidly than the general price
level, even though the wages of college professors have failed to keep pace with the price
level. Can you explain why?
College tuition fees have risen because the productivity of faculty members—measured,