Economics Chapter 17 The Government Is Involved In Providing Many Goods And Services

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S-247

interactive activity

Chapter 17

Public Goods and

Common Resources

1. The government is involved in providing many goods and services. For each

of the goods or services listed, determine whether it is rival or nonrival in

consumption and whether it is excludable or nonexcludable. What type of good

is it? Without government involvement, would the quantity provided be efficient,

inefficiently low, or inefficiently high?

1. a. Street signs are nonrival in consumption (if I make use of a street sign, that

does not reduce your opportunity to use it) and nonexcludable (no one can

prevent another person from making use of a street sign). So street signs are a

public good. Because of the free-rider problem, the quantity provided privately

would be inefficiently low.

b. Amtrak rail service is rival in consumption (if I consume a seat, you cannot)

and excludable (you cannot consume the service if you do not have a ticket).

c. Regulations limiting pollution are nonrival in consumption (my benefit from

these regulations is not diminished by your benefit) and nonexcludable (people

d. A congested interstate highway without tolls is rival in consumption (if I use

the highway, I create a negative externality for you—more congestion; that is,

e. A lighthouse is nonrival in consumption (if I use the lighthouse to steer my

boat away from rocks, you can still use the same lighthouse) and nonexclud–

Solution

2. An economist gives the following advice to a museum director: “You should

introduce ‘peak pricing.’ At times when the museum has few visitors, you should

admit visitors for free. And at times when the museum has many visitors, you

should charge a higher admission fee.”

a. When the museum is quiet, is it rival or nonrival in consumption? Is it exclud-

able or nonexcludable? What type of good is the museum at those times? What

would be the efficient price to charge visitors during that time, and why?

2. a. When the museum is quiet, it is nonrival in consumption: one additional visi-

tor does not diminish any other visitor’s ability to enjoy the museum. Further-

more, the museum is excludable (if you don’t pay the entrance fee, you are not

b. When the museum is busy, it is rival in consumption: one additional visitor in

the museum diminishes any other visitor’s ability to enjoy the museum because

of overcrowding. The museum is still excludable (if you don’t pay the entrance

3. In many planned communities, various aspects of community living are subject

to regulation by a homeowners’ association. These rules can regulate house

architecture; require snow removal from sidewalks; exclude outdoor equip–

ment, such as backyard swimming pools; require appropriate conduct in shared

spaces such as the community clubhouse; and so on. Suppose there has been

3. Using efficiency as the goal, a regulation is warranted if it provides a public

good or if it conserves a common resource. The enjoyment of pleasing and

harmonious architecture and snow removal from sidewalks are examples of

public goods: they are nonexcludable and nonrival in consumption. A clubhouse

is a common resource: it is nonexcludable but rival in consumption. So it pro–

Solution

4. The accompanying table shows Tanisha’s and Ari’s individual marginal benefit of

different amounts of street cleanings per month. Suppose that the marginal cost

of street cleanings is constant at $9 each.

Quantity of

street cleanings

per month

Tanisha’s

individual

marginal benefit

Ari’s individual

marginal benefit

$10 $8

a. If Tanisha had to pay for street cleaning on her own, how many street clean-

ings would there be?

b. Calculate the marginal social benefit of street cleaning. What is the optimal

number of street cleanings?

4. a. If Tanisha had to pay for street cleaning on her own, she would pay for the

street to be cleaned once: her individual marginal benefit of the first clean–

ing, $10, exceeds the marginal cost of $9. However, she would not pay for more

than one: her marginal benefit of the second cleaning is $6, less than the

marginal cost of $9.

b. The accompanying table shows the marginal social benefit of street cleaning.

The optimal number of street cleanings is 2: the marginal social benefit of the

second cleaning is $10, which exceeds the marginal cost of $9. A third clean-

ing would be inefficient because its marginal social benefit is $3, less than the

marginal cost of $9.

Quantity of

street

cleanings

per month

Tanisha’s

individual

marginal

benefit

Ari’s

individual

marginal

benefit

Marginal

social

benefit

$10 $8 $18

c. Tanisha on her own would be willing to pay only $6 (her individual marginal

benefit) for the second cleaning. Ari on his own would be willing to pay only

$4 (his individual marginal benefit) for the second cleaning. So neither would

be individually willing to pay for the second cleaning.

Solution

S-250 Chapter 17 Public Goods and common ResouRces

5. Anyone with a radio receiver can listen to public radio, which is funded largely

by donations.

a. Is public radio excludable or nonexcludable? Is it rival in consumption or

nonrival? What type of good is it?

b. Should the government support public radio? Explain your reasoning.

5. a. Public radio is nonexcludable: anyone with a radio receiver can pick up the

radio waves. It is nonrival: if I listen to public radio, that does not diminish

your opportunity to listen to it also. So public radio is a public good.

b. As with all public goods, private markets lead to an inefficient quantity of the

good being supplied. The individual marginal benefit from a certain amount

of public radio programming is less than the marginal social benefit from that

c. Transmitting only to satellite radios, where a fee is charged for the service,

makes public radio excludable. So public radio is now an artificially scarce

good. The efficient price for receiving the satellite radio signal would be zero,

since the marginal cost is zero. But since a positive price is charged, only

6. Your economics professor assigns a group project for the course. Describe the

free-rider problem that can lead to a suboptimal outcome for your group. To

combat this problem, the instructor asks you to evaluate the contribution of your

peers in a confidential report. Will this evaluation have the desired effects?

6. Without the confidential evaluation, the grade a member of a group receives

7. The village of Upper Bigglesworth has a village “commons,” a piece of land on

which each villager, by law, is free to graze his or her cows. Use of the com-

mons is measured in units of the number of cows grazing on it. Assume that

the marginal private cost curve of cow-grazing on the commons is upward slop–

ing (say due to more time spent herding). There is also a marginal social cost

Solution

Chapter 17 Public Goods and common ResouRces S-251

a. Is the commons excludable or nonexcludable? Is it rival in consumption or

nonrival? What kind of good is the commons?

b. Draw a diagram showing the marginal social cost, marginal private cost, and

the marginal private benefit of cow-grazing on the commons, with the quan–

c. The villagers hire you to tell them how to achieve an efficient use of the com-

mons. You tell them that there are three possibilities: a Pigouvian tax, the

7. a. The commons is nonexcludable since, by law, each villager is free to send his

or her cows there. It is also rival in consumption, since the grass that one vil-

lager’s cow eats is no longer available for another villager’s cow. So the com-

mons is a common resource.

b. The accompanying diagram shows the marginal private cost to villagers of

cow-grazing on the commons, MPC. It is also the supply curve of cows for

grazing. It lies below the marginal social cost curve, MSC. MSC is higher than

QOPT QMKT

Price

cow-

azing

Quantity of cows grazing

MSC

MPB

The outcome without government intervention is indicated by QMKT, the

quantity at which the marginal private benefit equals marginal private cost.

It is greater than the optimal, or efficient, equilibrium quantity, QOPT. That is,

Solution

S-252 Chapter 17 Public Goods and common ResouRces

MPC1. Each individual villager would now make the socially optimal, or effi-

cient, decision. Alternatively, ownership of the commons and the cows could

be assigned to one person. He or she would set the amount of grazing to the

efficient quantity. Last, villagers could create a system of tradable licenses for

QOPT QMKT

Quantity of cows grazing

8. Prior to 2003, the city of London was often one big parking lot. Traffic jams

were common, and it could take hours to travel a couple of miles. Each addi-

tional commuter contributed to the congestion, which can be measured by the

total number of cars on London roads. Although each commuter suffered by

social cost (MSC) curves and label the equilibrium point. (Hint: The marginal

cost takes into account the opportunity cost of spending time on the road for

individual drivers but not the inconvenience they cause to others.)

b. In February 2003, the city of London began charging a £5 congestion fee on

all vehicles traveling in central London. Illustrate the effects of this congestion

8. a. The accompanying diagram depicts the demand and individual marginal cost

(MC1) for using London roads. When no fees are levied for using the roads, the

equilibrium point is EMKT1. This is the usual market equilibrium when market

externalities are not corrected.

Cost of

travel

Quantity of car

QOPT QMKT

MSC

EMKT1

b. After the £5 fee is imposed, the market equilibrium moves as shown in the

accompanying diagram. The congestion charge effectively increases the cost

of traveling by car in central London, and the marginal cost curve shifts

upward, from MC1 to MC2. The commuters who are easily able to switch to

Cost of

travel

MC1

MC2

MSC

EMKT2

EMKT1

Upward shift

by £5

Solution

S-254 Chapter 17 Public Goods and common ResouRces

c. When the fee is raised to £9, the marginal cost curve moves farther up, to

MC3, and more people refrain from using central London roads as the equi-

librium quantity falls to the efficient quantity, QOPT. The charge of £9 is the

optimal Pigouvian tax in this case: it moves the equilibrium to the efficient

outcome, O.

Cost of

travel

Quantity of car

QOPT = QMKT

MC1

MC3

MSC

Upward shift

9. The accompanying table shows six consumers’ willingness to pay (his or her

individual marginal benefit) to download a Jay-Z album. The marginal cost of

making the file accessible to one additional consumer is constant, at zero.

Consumer Individual marginal benefit

Adriana $2

Bhagesh 15

Chizuko 1

Denzel 10

Emma 5

Frank 4

a. What would be the efficient price to charge for a download of the file?

9. a. Since the marginal cost of delivering the good to one additional consumer is

Solution

10. Butchart Gardens is a very large garden in Victoria, British Columbia, renowned

for its beautiful plants. It is so large that it could hold many times more visitors

than currently visit it. The garden charges an admission fee of $30. At this price,

1,000 people visit the garden each day. If admission were free, 2,000 people

would visit each day.

a. Are visits to Butchart Gardens excludable or nonexcludable? Are they rival in

consumption or nonrival? What type of good is it?

10. a. Visits to Butchart Gardens are excludable (there is an entrance fee) and

nonrival (the garden could hold many more visitors than it currently hosts, so

one visitor’s enjoyment of the park does not diminish another visitor’s enjoy-

ment). So visits to Butchart Gardens are an artificially scarce good.

b. The demand curve is illustrated in the accompanying diagram. The situation

when Butchart Gardens charges a $30 admission fee is indicated by point A on

the demand curve. The situation when Butchart Gardens charges no admis-

sion fee is indicated by point B on the demand curve.

Price

visit

Quantity of visits

c. The deadweight loss from charging a $30 admission fee rather than no fee

is indicated by the shaded area in the diagram. Since the marginal cost of

admitting one more visitor is zero, it would be efficient to charge no admis–

sion. However, since the good is artificially scarce and an admission fee of $30

Solution

11. Software has historically been an artificially scarce good—it is nonrival because

the cost of replication is negligible once the investment to write the code is

made, but software companies make it excludable by charging for user licenses.

But then open-source software emerged, most of which is free to download and

can be modified and maintained by anyone.

a. Discuss the free-rider problem that might exist in the development of open-

source software. What effect might this have on quality? Why does this prob–

lem not exist for proprietary software, such as the products of a company like

Microsoft or Adobe?

12. In developing a vaccine for the SARS virus, a pharmaceutical company incurs

a very high fixed cost. The marginal cost of delivering the vaccine to patients,

however, is negligible (consider it to be equal to zero). The pharmaceutical com-

pany holds the exclusive patent to the vaccine. You are a regulator who must

decide what price the pharmaceutical company is allowed to charge.

a. Draw a diagram that shows the price for the vaccine that would arise if the

company is unregulated, and label it PM. What is the efficient price for the

vaccine? Show the deadweight loss that arises from the price PM.

b. On another diagram, show the lowest price that the regulator can enforce that

would still induce the pharmaceutical company to develop the vaccine. Label

it P*. Show the deadweight loss that arises from this price. How does it com-

pare to the deadweight loss that arises from the price PM?

12. a. If the company is unregulated, it will behave like a monopolist and choose a

Solution

S-258 Chapter 17 Public Goods and common ResouRces

b. The lowest price that still induces the company to develop the vaccine is the

price at which the demand curve crosses the average total cost curve. At this

price, the company just breaks even. There is a smaller deadweight loss than

under the price PM. The deadweight loss is indicated by the shaded area in the

13. A residential community has 100 residents who are concerned about secu–

rity. The accompanying table gives the total cost of hiring a 24-hour security

service as well as each individual resident’s total benefit.

Quantity of

security guards Total cost

Total individual benefit

to each resident

0$0 $0

1150 10

2300 16

3450 18

4600 19

a. Explain why the security service is a public good for the residents of the

community.

b. Calculate the marginal cost, the individual marginal benefit for each

resident, and the marginal social benefit.

c. If an individual resident were to decide about hiring and paying for secu-

rity guards on his or her own, how many guards would that resident hire?

d. If the residents act together, how many security guards will they hire?