Public goods and externalities:
examples and exercises
Lecture 12 – academic year 2014/15
Introduction to Economics
Fabio Landini
Example of the bridge:
two-ways table
Many
Ye
s
Tax
No
Excludable
Not Excludable
Rival
(PRIVATE GOOD)
Rival
(COLLECTIVE GOOD)
Excludable
Not Excludable
Not Rival
(NATURAL MONOPOLY)
Not Rival
(PUBLIC GOOD)
N. persons
Few
INTRO
The book says that both public good
entail externalities.
A) Are the externalities associated with public
goods positive or negative? Give an example.
B) Would the quantity of public good produced
thorough free market be higher or lower than
the efficient one?
3
Index of examples/exercises
• INTRO
• Ex. 12.1 (externalities and alcohol consumption)
• Ex. 12.2 (permit I)
• Ex. 12.3 (firms and R&D)
• Exercise on public good
• Ex. 12.4 (the Economist)
• Ex. 12.5 (permit II)
Ex.12.1
The higher alcohol consumption, the higher the
number of car accidents, and thus the higher the
risk of driving.
(a) Are there externalities in the market for
alcoholic beverages?
(b) Is there a net loss with respect to the market
equilibrium?
Ex.12.2
Firm
A
B
Level of pollution
(units)
Cost to reduce
pollution (units)
110
30
50
10
In order to bring the level of global pollution to
80 units, the Government assigns to each firm 40
tradable permits to pollute one unit.
Ex.12.2
a) Who offer the permits in the market? How
many? Who purchases them? How many?
Explain the motivations behind buyer’s and
seller’s decision.
b) How much would the cost to reduce
pollution be if permits were not tradable?
Ex.12.3
People tend to argue that firms tend not not carry
out basic research (BR) at an efficient level.
Why is this so?
a) Which type of good is BR?
b) Which type of policy has been adopted by US?
c) It is generally believed the the adopted policy
increases the technological capabilities of firms with
respect to competitors. Is this argument coherent
with the adopted classification?
Exercise on public goods
100 inhabitants of a urban district are worried
about their SECURITY.
N. Guards
24h
Tot. Cost
(Euro)
Individual benefit for
each inhabitant
(Euro)
0
0
0
1
150
10
2
300
16
Exercise on public goods
Questions:
a)Is the surveillance service a public good for
inhabitants? Why?
b)If one inhabitant decided to the pay the
surveillance service by her own, how many
guards would she hire?
c)If 50 inhabitants made an agreement in which
all pay one share of the cost of surveillance, how
many guards would they hire?
Ex.12.5
The Economist , 19/03/1994: “in the last decade,
world’s fishing areas have been exploited near to
their depletion”. Then, analysis of the problem and
possible solutions, both private and public:
a) “Fishers cannot be blamed for over-exploitation,
somehow, they behave rationally ad they have
always done”. In which sense is over-exploitation
rational from the fishers’ point of view?
Ex.12.5
b) “A community, tighten by common obligations
and interests, is able to self-manage a common
resource”. Explain.
Ex.12.5
c) “Until 1976 most part of the world’s fishing areas
were open to everybody, making it impossible to
apply any policy for preservation. Since then,
international law has extended the national
jurisdiction from 12 to 200 miles form the coast”.
Explain how this agreement can contribute to
(partially) solve the problem.
Ex.12.5
d) Several governments encourage fishing by giving
aids to fishers. Explain in which way these incentives
favoured over-exploitation.
e) “Only if fishers will be granted an exclusive right
on a specific fishing area management as efficient
as the one of a farmer on her own land will obtain”.
Find argument in support of this statement.
f) Are there other policy interventions that could be
implemented in order to reduce over-exploitation of
world’s fishing areas?
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