Question & Answer

What are the possible arguments in favour of fixing prices

(a) below and

(b) above the equilibrium?

Are there any means of achieving the same social goals without fixing prices?

Imagine that a public project yields a return of 13 per cent (after taking into account all social costs and benefits), whereas a 15 per cent private return could typically be earned in the private sector. How would you justify diverting resources from the private sector to this project?

How would you evaluate (a) the external effects of building a reservoir in an area of outstanding natural beauty; (b) the external effects of acid rain pollution from a power station?

How would you attempt to value time that you yourself save

(a) getting to work;

(b) going on holiday;

(c) going out in the evening?

What price should be used when there is such a distortion?

In what way is the provision of information a public good? Do all the examples above come into the category of public goods? Give some other examples of information which is a public good. (Clue: refer back to the characteristics of public goods in section 12.2 and do not confuse a public good with something merely provided by the government, which could also be provided by the private sector.)

What other forms of intervention are likely to be necessary to back up the work of regulatory bodies?

How suitable are legal restrictions in the following cases?

(a)  Ensuring adequate vehicle safety (e.g. that tyres have sufficient tread or that the vehicle is roadworthy).

(b)  Reducing traffic congestion.

(c)  Preventing the abuse of monopoly power.

(d)  Ensuring that mergers are in the public interest.

(e)  Ensuring that firms charge a price equal to marginal cost.

1. To what extent could property rights (either public or private) be successfully extended and invoked to curb the problem of industrial pollution (a) of the atmosphere; (b) of rivers; (c) by the dumping of toxic waste; (d) by the erection of ugly buildings; (e) by the creation of high levels of noise?

2. What protection do private property rights in the real world give to sufferers of noise (a) from neighbours; (b) from traffic; (c) from mobile phones on public transport?

If the sufferers had no property rights, show how it would still be in their interests to ‘bribe’ the firm to produce the socially efficient level of output.

1. Why is it easier to use taxes and subsidies to tackle the problem of car exhaust pollution than to tackle the problem of peak-time traffic congestion in cities?

2. CFCs in fridges were known to cause environmental damage and their use has been banned in most countries. Why has this approach been adopted rather than the tax solution?

Would could we say about the necessary subsidy if the MR curve crossed the horizontal axis to the left of point b?

Give some examples of how correcting problems in one part of the economy will create problems elsewhere.

How do the economic policies of the major political parties differ? (If it is near an election you could refer to their manifestos.) How far can an economist go in assessing these policies?

How do merit goods differ from public goods?

Give examples of how the government intervenes to protect the interests of dependants from bad economic decisions taken on their behalf.

1. Assume that you wanted the following information. In which cases could you (i) buy perfect information, (ii) buy imperfect information, (iii) be able to obtain information without paying for it, (iv) not be able to obtain information?

(a)  Which washing machine is the most reliable?

(b)  Which of two vacant jobs is more satisfying?

(c)  Which builder will repair my roof most cheaply?

(d)  Which builder is best value for money?

(e)  How big a mortgage would it be wise for me to take out?

(f)   Should I take a degree or get a full-time job?

(g)  What brand of washing powder washes whiter?

(h)  Will a house need any work done on it over the next few years?

In which cases are there non-monetary costs to you of finding out the information? How can you know whether the information you acquire is accurate or not?

2. Make a list of pieces of information a firm might want to know, and consider whether it could buy the information and how reliable that information might be.

3. What has been the impact of the Internet on the provision of information?

Why will Pareto optimality not be achieved in markets where there are substantial economies of scale in production?

Referring back to Figure 10.8 on page 293, and assuming that the MRP_L curve represents the marginal social benefit from the employment of a factor, and that the price of the factor represents its marginal social cost (i.e. assuming no externalities), show that a monopsony will employ less than the Pareto optimal amount of factors.

1. Give some other examples of public goods. Does the provider of these goods (the government or local authority) charge for their use? If so, is the method of charging based on the amount of the good that people use? Is it a good method of charging? Could you suggest a better method?

2. Name some goods or services provided by the government or local authorities that are not public goods.

3. Are there ways in which we could overcome the free-rider problem? Start by thinking about the provision of a public good amongst a group of friends or neighbours.

1. To what extent can the following be regarded as common resources? (a) rain forests; (b) children’s playgrounds in public parks; (c) silence in a library; (d) the Internet.

2. Where would you place each of the following in Figure 12.8: (a) an inner city road at 3:00am; (b) an inner city road at 8:00am; (c) a toll motorway at 3:00am; (d) a toll motorway at 8:00am?

To what extent is national defence a pure public good? Can it ever be rivalrous or excludable in consumption?

How rivalrous in consumption are each of the following: (a) a can of drink; (b) public transport; (c) a radio broadcast; (d) the sight of flowers in a public park?

1. Give other examples of each of the four types of externality.

2. Redraw Figure 12.4, only this time assume there is only one producer, which is thus a monopoly. How does the existence of power affect the relationship between the private and the social optimum positions?

3. Redraw Figure 12.4, only this time assume that at low levels of production the good generates no external costs. Only once a certain outcome is reached (Q_x) does the production of additional units generate rising external costs.

Why are marginal external benefits typically likely to decline as output increases? Why is some cases might marginal external benefits be constant at all levels of output or even increase as more is produced?