mctaggart econ 6e esg ch08

8 PUBLIC CHOICES AND PUBLIC GOODS

C h a p t e r

K e y C o n c e p t s

Public Choices

A public choice is a choice that has consequences for more people than the decision maker. Sometimes a public choice has consequences for a whole society. For example, a decision made by a bureaucrat employed in the Australian Tax Office, and approved by the legislative process, can have consequences not only for tax payers, but for the efficient allocation of resources throughout the economy (see Chapter 6). Public choice can also be defined by reference to private choice. A private choice has consequences only for the person making that choice. Although we hope public choices made by governments will yield results in line with the public interest, the reality is that inefficient outcomes often result. Economists explain this fact through the theory of the political marketplace. In this market, four self-interested groups - voters, firms, politicians and bureaucrats - interact to bring about a political equilibrium. This equilibrium is a position where the choices of the four groups are compatible in that no one group can see a way of improving its position by making a different choice. The core reason for the need for public choices is the existence of public goods. Public goods are best understood through the concepts of excludability and rivalry. A good, service, or resource can be classified as either ♦ Excludable — it is possible to prevent someone

from enjoying the good’s benefit, or ♦ Nonexcludable — it is impossible (or extremely

costly) to prevent anyone from benefiting from the good.

and as either ♦ Rival — one person’s consumption decreases the

quantity available for someone else, or ♦ Nonrival — one person’s consumption does not

decrease the quantity available for someone else. A private good is rival and excludable; a public good is nonrival and nonexcludable. a common resource is rival and nonexcludable; and, if a natural monopoly can produce at zero marginal cost, the natural monopoly is nonrival and excludable. In addition, there also exist mixed goods. These are private goods, the production of which is associated with either an external benefit or an external cost. A car is an example of a private good with an external cost. This cost is the pollution emitted by the car which has an adverse impact on parties other than the producer and consumer of the car.

Providing Public Goods

A free-rider is a person who consumes a good or service without paying for it. Because public goods are nonexcludable, they create a free-rider problem, that the market would provide an inefficiently small quantity of a public good. Just like the case for a private good, a person’s marginal benefit from a public good decreases as more of the good is consumed. Because everyone consumes the same units of a public good, the marginal social benefit of a public good is the sum of the marginal benefits of all individuals at each quantity. The economy’s marginal social benefit curve from a public good is given by the vertical sum of each person’s marginal benefit curve. (This construction contrasts with the marginal social benefit curve for a private good which is the

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P U B L I C G O O D S A N D P U B L I C C H O I C E S 1 3 3

horizontal sum of each person’s marginal benefit curve.) The efficient quantity of a public good is the amount that sets the marginal social benefit of another unit equal to the marginal social cost of supplying it. ♦ With private provision, free riding limits the

amount produced and results in an inefficiently low level of output.

♦ Government provision can attain efficiency because free riding is prevented by imposing taxes to finance production of the good.

The amount of the good that is provided by the government depends on the political marketplace and the actions of politicians, bureaucrats, and voters. Politicians often follow the principle of minimum differentiation: ♦ Principle of minimum differentiation — the

tendency for competitors (political parties) to make themselves similar in order to appeal to the maximum number of clients or voters.

Bureaucrats try to maximise the budgets of their agencies. ♦ If voters are well informed, politicians won’t

allow bureaucrats to expand expenditure beyond the efficient level.

♦ Voters might be rationally ignorant; that is, they decide not to acquire information because the (personal) cost of acquisition is larger than the (personal) expected benefit from the information.

Providing Mixed Goods

Knowledge as well as research and development can create external benefits. ♦ Marginal private benefit (MB) — the benefit from

an additional unit of a good or service that the consumer of that good or service receives.

♦ Marginal external benefit — the benefit from an additional unit of a good or service that people other than the consumer enjoy.

♦ Marginal social benefit (MSB) — the marginal benefit enjoyed by the entire society, both by the consumer and by everyone else. In an equation, MSB = MB + Marginal external benefit.

Figure 8.1 shows the marginal benefit curve, which is the private demand curve and is labelled MB = D. The marginal social benefit curve is labelled MSB.

The marginal external benefit is the vertical distance between the two curves, equal at 400 units to the length of the double headed arrow, $40 per unit. The supply curve is the same as the marginal social cost curve and is labelled S = MSC. The efficient quantity is 400 units, where the MSC and MSB curves intersect. The equilibrium quantity is 200 units, where the D and S curves intersect. A deadweight loss is created because less than the efficient quantity is produced.

The government has three methods it can use to attain a more efficient outcome when external benefits exist: ♦ Public provision — a public authority that

receives its revenue from the government can produce the good or service. In Figure 8.1, the government can produce the efficient quantity, 400. It then sets the price equal to $10 per unit to insure that demanders buy 400 units.

♦ Private subsidies — a subsidy is a payment from the government to the private producers of the good or service. A subsidy increases the supply of the good and thereby increases the quantity produced.

♦ Voucher — A voucher is a token that the government provides to households, which they can use when they buy specified goods or

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services. In Figure 8.1, a voucher equal to the length of the double headed arrow, $40 per unit, would shift the demand curve so that the equilibrium quantity is the same as the efficient amount, 400 units.

If voters are rationally ignorant, politicians, influenced by bureaucrats and lobbyists representing special interests, might allow inefficient overprovision of the public good. If the government is inefficiently providing too many public goods, a voter backlash might occur when voters act to shrink the size of the government. Two theories of government action are: ♦ Social interest theory — predicts that

governments act to eliminate waste and achieve economic efficiency.

♦ Public choice theory — predicts that government can create inefficiency.

Based on these theories, government might grow because of voter preferences (the social interest theory) or because of inefficient overprovision (public choice theory).

H e l p f u l H i n t s

1. PUBLIC GOODS AND GOVERNMENT PROVIDED GOODS : Not all goods provided by the government are public goods. A public good is defined by the characteristics of nonrivalry and nonexcludability, not by whether it is publicly provided. For example, some cities and communities provide swimming pools; others provide community services such as care for the elderly. None of these are public goods even though they are provided by the government. Indeed, in many communities, the same services are provided by the private sector.

2. THE MARGINAL SOCIAL BENEFIT FROM A PUBLIC GOOD : The properties of nonrivalry and nonexcludability associated with pure public goods imply that the marginal social benefit curve for the economy is different from that for private goods.

A private good is rival in consumption. Therefore, to obtain the marginal social benefit

curve for the entire economy, we sum the individual marginal benefit curves horizontally. For instance, at a price of $8 you demand 5 units and I demand 5 units. Because the goods are rival in consumption, none of the 5 units you consume at this price can be the same as any of the 5 units I consume. So, we sum the quantities and at $8, in total we demand 10 units. However, for the economy’s marginal social benefit curve for a public good, we sum the individual marginal benefit curves vertically. For instance, for 5 units you are willing to pay $8 and I am willing to pay $8. If 5 units are provided, because the public good is nonrival, the 5 units that you consume are precisely the same as the 5 units that I consume. So, we sum the prices and at 5 units, in total we are willing to pay $16. The key difference — that for a public good we consume the same units but for a private good we must consume different units — is the reason that the marginal social benefit curve for a public good is derived differently from that for a private good.

Q u e s t i o n s

True/False and Explain

Public Choices

1. Supposing the Australian federal government adopts the recommendations of the Bradley Review into higher education. This would be an example of public choice.

2. In Australia, senior public servants work together to achieve the social interest, as expressed by the will of the people through their votes, and under the direction of their respective political leaders.

3. A movie shown in an uncrowded movie theatre is both nonexcludable and nonrival in consumption.

4. Any product supplied by government is a public good.

5. A fish in the middle of the ocean is a common resource.

6. Public goods — but not private goods — face the free-rider problem.


7. A private, unregulated market produces less than the efficient quantity of pure public goods.

8. The tragedy of the commons is that people use an inefficiently small quantity of the common resource.


9. A person’s marginal benefit from a public good increases as more of the good is consumed.

10. The marginal social benefit curve for a public good is obtained the same way as the marginal social benefit curve for a private good.


11. Rational ignorance is the situation wherein politicians are uninformed about certain voters’ desires.

12. The public choice theory predicts that the government makes choices that achieve efficiency.

13. Knowledge is an example of a product with external benefits.

14. The private market produces more than the efficient amount of a good having an external benefit.

15. A subsidy can be the appropriate policy for a good or service with an external benefit.

16. Taxing private producers of education can help overcome the externality problem of education

Multiple Choice

Public Choices

11. All of the following are reasons for the existence of government EXCEPT: a. to establish and maintain property rights. b. to provide non-market mechanisms for the

allocation of scarce resources in cases of market failure.

c. to provide a means for the redistribution of income and wealth if the market outcome is not socially acceptable.

d. all of the above are reasons for the existence of government.

12. The interaction of voters, firms, politicians and bureaucrats in the political market place leads to an equilibrium in which: a. the social interest is achieved. b. allocative efficiency is achieved. c. an optimal allocation of resources is achieved. d. no one group can see a way of improving its

position through a different choice.

13. A vaccination against the H1N1 virus (or swine flu) is a mixed good because the external _______ of the vaccine are _________ and ___________ . a. benefits; excludable; rival b. benefits; non-excludable; non-rival c. costs; excludable; rival d. costs; non-excludable; non-rival

14. Of the following, which is the best example of public good? a. The defence services provided by the

Australian armed forces b. A pair of jeans c. A cable television system d. An uncrowded theme park such as Movie

World on the Gold Coast.

15. To two fishermen, a tuna fish swimming in the middle of the ocean is a good that is a. nonrival and nonexcludable. b. nonrival and excludable. c. rival and nonexcludable. d. rival and excludable

16. To two farmers, a cow (owned by one of the farmers) grazing in the middle of that farmer’s paddock is a. nonrival and nonexcludable. b. nonrival and excludable. c. rival and nonexcludable. d. rival and excludable

7.

Which of the following is rival and nonexcludable? a. A public good b. A common resource c. A private good d. A natural monopoly

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8.

The efficient amount of a public good a. is as much as the public demands. b. cannot be provided unless the tragedy of

nonexcludability is overcome. c. is the amount that has the marginal social

benefit exceeding the marginal social cost by as much as possible.

d. is such that the marginal social benefit equals the marginal social cost.

19.

A free-rider is someone who a. does not pay taxes. b. cannot be excluded from consuming a public

good even though he or she did not pay for the good.

c. paid more than his or her fair share for the provision of a public good.

d. cannot be forced to pay for his or her consumption of a private good.

10.

The economy’s marginal social benefit curve for a public good is obtained by summing the individuala. marginal cost curves horizontally. b. marginal cost curves vertically. c. marginal benefit curves horizontally. d. marginal benefit curves vertically.

11.

Suppose that the marginal social benefit from another unit of a public good exceeds the marginal social cost of producing it. Then a. the public good is the same as a private good

and provision is at the efficient level. b. the public good is not the same as a private

good but provision is at the efficient level. c. less of the product should be produced because

its provision exceeds the efficient level. d. more of the product should be produced

because its provision is less than the efficient level.

12. Governments often provide public-goods such as national-defence because a. governments know how to produce these

goods. b. of the free-rider problems that result in

underproduction by private markets. c. people do not value national defence very

highly. d. of the potential that private firms will make

excess profits.

13. The idea that political parties will have similar policy proposals reflects a. free riding. b. rational ignorance. c. government failure. d. the principle of minimum differentiation.


14. Amy realises that her personal benefit from becoming an expert on welfare reform is limited, so she does not learn about this issue. Amy’s decision best reflects a. free riding. b. the nonexcludability principle. c. the principle of minimum differentiation. d. rational ignorance.

15. The amount of a public good that maximises the net benefit to the economy is likely to be provided if a. voters are well informed. b. rational ignorance is combined with special

interest lobbying. c. politicians are well informed. d bureaucrats are rationally ignorant.


16. Public choice theory predicts that a. the government conducts policies that move

the economy toward an efficient use of resources.

b. politicians and bureaucrats tend to be more concerned about the social interest than individuals in the private sector.

c. the choices of government maximise net benefits.

d. the choices of government can create inefficiency.


Use Table 8.1 for the next four questions.

T A B L E 8 . 1

Multiple Choice Questions 17, 18, 19, 20

Quantity

Marginal private

cost (dollars)

Marginal private

benefit (dollars)

Marginal social

benefit (dollars)

500 $5 $9 $11

550 6 8 10

600 7 7 9

650 8 6 8

700 9 5 7

17. Table 8.1 represents the market for a good with a. only an external cost. b. only an external benefit. c. both external costs and benefits. d. no externalities.

18. Left unregulated, the equilibrium quantity is a. 550. b. 600. c. 650. d. 700.

19. The efficient level of output is a. 550. b. 600. c. 650. d. 700.

20. What can the government do so that the efficient level of output is produced? a. Subsidise suppliers $8 per unit. b. Subsidise suppliers $2 per unit. c. Tax suppliers $2 per unit. d. Tax suppliers $8 per unit.

21. Which of the following is NOT an appropriate solution for the Australian government in the provision of an efficient quantity of education? a. abolish the higher education sector, as

Australia does not have a comparative advantage in education, and students should obtain their degrees overseas.

b. public provision c. private subsidies d. vouchers

Short Answer Problems

1. Explain the nonrivalry and nonexcludability features of a pure public good. Why are both necessary for the good to be a pure public good?

2. What is the free-rider problem? For what type of goods is the free-rider problem particularly acute? Why does free riding hinder private firms from producing the efficient amount (or any amount!) of a public good?

T A B L E 8 . 2

Security at Parkin Springs Retirement Village

Number of guards

Total cost of guards (dollars )

Marginal benefit per

resident (dollars)

Marginal social benefit to all residents

(dollars)

1 $300 $10 $____

2 600 4 ____

3 900 3 ____

4 1,200 2 ____

3. Parkin Springs Retirement Village has 100

residents who all are concerned about security. Table 8.2 gives the total cost per day of hiring a 24-hour security guard service and the marginal benefit per day to each of the residents.

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a. Why is a security guard a public good for the residents of Parkin Springs Retirement Village?

b. Why will no guards be hired if each of the residents must act individually?

c. Complete the last column of Table 8.2 by computing the marginal social benefit of security guards to all the residents combined.

d. Suppose the residents decide they will engage a security service. What is the efficient number of guards to employ?

4. Explain why voter ignorance might be rational. 5. In Australia, the federal government claims to

provide higher education at a price less than cost. What economic argument supports the policy of charging students at public universities less than the full cost of their education?

6. Vaccination creates an external benefit and has

no external costs. Use Figure 8.2 to illustrate the market for the swine flu vaccination. In the figure, arrange your curves so that 50 thousand doses will be taken in the absence of any government intervention and 75 thousand doses is the efficient number of doses. How can the government move this market toward efficiency?

7. The first two columns of Table 8.3 give the demand schedule for education in Transylvania,

and the third column gives the marginal private cost. Because education generates external benefits, the marginal social benefit shown in the last column is greater than marginal private benefit. Education creates no external costs. a. What equilibrium price and quantity would

result if the market for education is unregulated?

T A B L E 8 . 3

Education in Transylvania

Quantity (number

of students)

Marginal private

benefit (dollars)

Marginal private

cost (dollars)

Marginal social

benefit (dollars)

1 $500 $200 $800

2 400 250 700

3 300 300 600

4 200 350 500

5 100 400 400

6 0 450 300

b. What is the efficient quantity of students in

Transylvania? c. In an attempt to address the inefficient level

of education in his nation, Igor — the newly appointed minister of education — has decided to provide a low-cost public university, Igor Omphesus (Igor’s middle name is Omphesus) University. To attain the efficient level of schooling, what must tuition be at the new university, I.O.U.?

d. What is the marginal cost of schooling the last student at this university?

You’re the Teacher

1. “I don’t see why the government would ever do anything that leads to inefficiency. Inefficiency hurts the nation and I thought that the government would try to help us.” Comment on this student’s views and give an example of how the government might take actions that create inefficiency.


A n s w e r s

True/False Answers

Pubic Choices

11. T This would be a choice made by political leaders with potential consequences for many people, including, perhaps, the allocation of resources away from training skilled trades people, to university education.

12. F While this is the ideal outcome, senior public servants are also bureaucrats whose self interest is served through the maximisation of their own career prospects, and their own departmental budgets.

13. F The movie is nonrival but not nonexcludable because a theatre can easily exclude people who do not pay to see the movie.

14. F Public goods are characterised by nonrivalry and nonexcludability not by government supply.

15. T The fish is rival, because if one person catches it another cannot, and nonexcludable, because the people cannot prevent the other from trying to catch it.

16. T Public goods are nonexcludable and so they face a severe free-rider problem.

17. T A private unregulated market will produce less than the efficient quantity of a public good due to the free-rider problem.

18. F The tragedy of the commons is that people use an inefficiently large quantity of the common resource.


19. F Like the marginal benefit from a private good, the marginal benefit from a public good decreases as more of the good is consumed.

10. F The marginal social benefit curve for a public good is derived by adding vertically each individual’s marginal benefit curve; the marginal social benefit curve for a private good is derived by adding horizontally each person’s marginal benefit curve.

Providing Mixed Goods 11. F Rational ignorance occurs when a voter is

uninformed about an issue because the benefit to the voter of becoming informed is less than the cost to the voter.

12. F The social interest theory predicts that the government makes choices to achieve efficiency; the public choice theory says that government choices can result in inefficiency.

13. T Knowledge has benefits that spill over to others, so knowledge has external benefits.

14. F The private market produces less than the efficient amount of a good with an external benefit.

15. T Left alone, the private market would produce less than the efficient amount of the good. A subsidy will increase the amount produced.

16. F Education has an external benefit, so the more appropriate policy is to subsidise, not tax, education.

Multiple Choice Answers

Public Choices

11. d The question covers the three reasons for the existence of government in a market economy.

12. d Each of the four groups seeks to maximise their own interests, so that while political equilibrium may be compatible with the social interest and allocative efficiency, it is more likely that this will not be the case.

13. b The external benefit associated with one individual receiving the vaccine is that the risk for others of contracting the virus is also decreased. This benefit is both non-excludable and non-rival.

14. a The defence services are nonrival and nonexcludable and so are a public good.

15. c If one tuna fisherman catches the fish, the other cannot, so the tuna fish is rival; but in the middle of the ocean no fisherman can exclude another from trying to catch the fish, so the tuna fish is nonexcludable.

16. d The farmer who owns the cow can use it but the other farmer cannot, so the cow is rival; in the middle of a paddock, the first farmer can

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exclude the other farmer from trying to catch the cow. Note the fundamental difference between the cow which is owned and therefore is both rival and excludable, and the fish, which is not owned and therefore is rival but nonexcludable.

17. b A common resource, such as fish in the ocean, is rival and nonexcludable.

18. d If the marginal social benefit from any good equals the marginal social cost, the efficient amount is produced.

19. b This answer is the definition of a free-rider. 10. d Vertical summation shows the price everyone

in total is willing to pay for any particular quantity.

11. d If one more unit is produced, the gain to society (the marginal social benefit) exceeds the cost to society (the marginal social cost), so society is better off if the unit is produced.

12. b The free-rider problem means it is not profitable for private firms to produce public goods. Therefore, they are often produced by governments.

13. d In a two party political system, both parties want to appeal to a majority of voters in order to be elected. So to appeal to voters, both present similar proposals, which is the principle of minimum differentiation.

14. d Amy is pursuing her own self-interest and rationally decides not to become an expert on welfare reform.

15. a If voters are well informed, they can ensure that politicians force bureaucrats to provide the efficient amount of the public good.

16. d Public choice theory says that rational ignorance might lead to inefficient outcomes.


17. b At any level of output, the marginal social benefit exceeds the marginal private benefit, which indicates that there must be an external benefit.

18. b The private market produces the level of output that equalises the marginal private cost (the private supply curve) and the marginal private benefit (the private demand curve).

19. c Efficiency requires that the amount of the good produced equalise the marginal social cost and the marginal social benefit. In this case, efficiency requires that output be 650.

20. b If suppliers are granted a $2 per unit subsidy, the marginal private cost schedule drops by $2 at every unit of output. Hence to produce 650 units of output, the new marginal private cost becomes $6. This equals the marginal private benefit of 650 units, so the (new) equilibrium price is $6 and the quantity produced is the efficient amount, or 650 units.

21. a Abolishing the higher education sector would have numerous adverse effects on the Australian economy, beginning with an increase in the “brain drain” of qualified people from Australia to other destinations.

Answers to Short Answer Problems

1. A good has the nonrivalry feature if its consumption by one person does not reduce the amount available for others. The nonexcludability feature means that if the good is produced and consumed by one person, others cannot be excluded from consuming it.

Both characteristics are necessary for the good to be a pure public good. The nonrivalry feature of a public good means that everyone can consume the good simultaneously. Limiting the consumption to one person at a time would be inefficient because others can consume the product without denying it to anyone else. In addition, private goods are sold by firms so that the firms’ owners can earn an income and thereby purchase goods and services for themselves. Public goods are nonexcludable, which means that anyone can consume the product regardless of the amount paid. This fact gives people the incentive to free ride. Free riding makes the provision of such goods by private companies unlikely because the firm will not be able to collect any revenue from selling the product.

2. The free-rider problem is that people will try to avoid paying for a public good. In unregulated markets the free-rider problem results in the production of too little of a public good because there is little incentive for individuals to pay for


it. The free-rider will not pay because that payment will likely have no perceptible effect on the amount the person will be able to consume. Hence avoiding payment is rational. This incentive creates a problem for the private sector when it attempts to provide the product. In particular, suppliers — firms — produce goods in exchange for payments because the suppliers want to use their income to buy goods and services for themselves. If people do not pay for the goods, suppliers receive no income and hence have no incentive to produce the goods.

3. a. A security guard is a public good in this case, because the guard has the features of nonrivalry and nonexcludability. Employment of the guard involves nonrivalry because one resident’s consumption of the security provided does not reduce anyone else’s security. Nonexcludability is involved because, once a security guard is in place, all residents enjoy the increased security and none can be excluded.

b. If each resident must act individually to hire a security guard none will be hired because each resident receives only $10 in benefit from the first guard, who costs $300 per day.

T A B L E 8 . 4

Short Answer Problem 3

Number of guards

Total cost of guards (dollars )

Marginal benefit per

resident (dollars)

Marginal social benefit to

all residents (dollars)

1 $300 $10 $1,000

2 600 4 400

3 900 3 300

4 1200 2 200

c. The entries in the last column of Table 8.4

show the marginal social benefit. These answers are obtained by multiplying the marginal benefit per resident by the number of residents, 100. This multiplication is the numerical equivalent of summing the individual marginal private benefit curves vertically for each quantity of guards.

d. If the apartment council hires the number of guards that sets the marginal social benefit

equal to the marginal social cost, it will hire the efficient number of guards. The marginal social benefit of the third guard, $300, equals the marginal social cost, $300, so the efficient number of guards is 3.

4. Most issues have only a small and indirect effect on most voters. So for a voter to spend much time and effort to become well informed about such issues would be irrational because the additional cost incurred by the voter would exceed any additional benefit enjoyed by the voter. Only if the voter is significantly and directly affected by an issue does becoming well informed pay. As a result, most voters will be rationally ignorant about any specific issue.

5. The economic argument is that education generates external benefits. In particular, when individuals are educated, society at large receives benefits beyond the private benefits that accrue to those choosing how much education to obtain. The presence of the external benefit means that in the absence of government intervention, the private sector would provide too little education. To attain efficiency in the market for education, the government provides below-cost education at Australia’s public universities. Thoughtful economics students might look at the number of students in their various lectures, and the conditions of the lecture theatres in which they are held, (not to mention the overworked lecturers) and have serious doubts about the efficiency of government provision.

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6. Figure 8.3 shows the market for swine flu

vaccine. Because there are no external costs, the marginal social cost curve equals the marginal private cost curve, which is the same as the supply curve. This curve is labelled S = MC = MSC in the figure. It also is the private supply curve. However, the presence of the external benefit means that the marginal social benefit (MSB) curve lies right of the marginal private benefit curve, which is the same as the private demand curve (labelled MB = D). The vertical distance between the curves equals the marginal externality; that is, it is the additional (external) benefit to society over and above the benefit to the consumer. In the absence of government intervention, 50 thousand doses of vaccine are produced but the efficient amount is 75 thousand doses. To move this market closer to the efficient level of output, the government might subsidise production. This policy could take the form of paying producers to produce more vaccine. The aim is to shift the private supply curve rightward so that it intersects the private demand at 75 thousand doses, the efficient amount, and price $10 per dose. Alternatively, the government might buy 75 thousand doses and then resell them to consumers below cost at $10 per dose, the price necessary to induce consumers to buy 75 million doses.

7. a. In an unregulated market, the equilibrium price and quantity are determined by the intersection of the marginal private benefit and marginal private cost curves because these are the market’s demand and supply curves, respectively. Thus the equilibrium price is $300, and the equilibrium quantity is 3 students.

b. The efficient quantity is determined by the intersection of the marginal social cost and marginal social benefit curves. Because there are no external costs, the marginal private cost equals the marginal social cost. As a result, efficiency is attained at a quantity of 5 students attending college.

c. Igor wants 5 students to attend his new university, I.O.U. Five students will attend only when the tuition is $100.

d. When 5 students attend the university, the marginal cost of the 5th student is $400. By charging the student only $100 in tuition, Igor apparently is losing money on this student. However, the loss is only apparent: Five students are the efficient level of education because the total marginal social benefit from the 5th student is $400, which equals the marginal cost of educating this student.

You’re the Teacher

1. “The idea that the government won’t create inefficiency is called the ‘social interest’ theory of government. It’s based on the assumption that government actions lead to efficiency. However, ‘public choice’ theories of government suggest that at times government actions can result in inefficiency, that is, can cause government failure. Public choice theories assert that well-informed special interest groups are able to induce the government to undertake programs that do not maximise net benefits because most voters are rationally ignorant. For most voters, being well informed about any particular issue does not pay. As a result, a small, well-informed interest group has an influence on government programs that greatly exceeds its size relative to all voters.

“Suppose there are three large producers of copper in Australia. If they can convince the


government to tax foreign copper $1 per ton, each U.S. copper producer may benefit by $80 million dollars. Meanwhile, this tax might cost each consumer in Australia 80¢. It seems clear to me that the copper producers are going to lobby like crazy for this policy and contribute a lot of dough

to candidates’ campaigns. But you and I aren’t going to care much. It sure isn’t in our personal interest to study this issue because we can gain, at most 80¢! So we’ll stay rationally ignorant, but the copper producers will lobby hard, so this policy might be enacted.


C h a p t e r Q u i z

11. Which of the following goods is nonexcludable? a. a lighthouse b. pay-per-view television c. a restaurant meal d. a college education

12. If a good has an external benefit, a market left unregulated will produce a. more than the efficient amount. b. the efficient amount. c. less than the efficient amount. d. an amount that may be more than, less than, or

equal to the efficient amount depending on how large the external benefit is relative to the private benefit.

13. A public good is necessarily a. nonrival and nonexcludable. b. nonrival and excludable. b. rival and nonexcludable. d. rival and excludable.

14. Of the goods and activities listed below, the best example of a public good is a. a tuna in the ocean. b. national defence. c. building a large apartment for low-income

families. d. producing paper for use in newspapers.

15. The private marginal benefit from a good is less than the social marginal benefit but the private marginal cost of the good equals the social marginal cost. As a result, the good ____ external benefits and ____ external costs. a. has; has b. has; has no c. has no; has d. has no; has no

16. What characteristic of a public good makes free riding possible? a. The nonrival characteristic. b. The rival characteristic. c. The nonexcludable characteristic. d. The excludable characteristic.

17. When a student makes a decision about how much schooling to acquire, the student considers only the a. private marginal benefits and private marginal

costs. b. social marginal benefits and social marginal

costs. c. marginal external benefits and marginal

external costs. d. private marginal benefits and social marginal

costs.

18. Who might opt to be rationally ignorant? a. Special interest groups. b. Voters. c. Politicians. d. Bureaucrats.

19. The marginal social benefit curve of a public good is calculated by _____ summing individual marginal ____ curves. a. vertically; cost b. vertically; private benefit c. horizontally; social benefit d. horizontally; private benefit

10. To offset the externality from knowledge, governments use all of the following EXCEPT a. patents. b. copyrights. c. below-cost provision. d. taxes.

The answers for this Chapter Quiz are on pages 316-317.

mctaggart econ 6e esg ch08

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