Question 1

Suppose that Martin owns a lighthouse and Lewis owns a nearby port.Martin's lighthouse benefits only those ships that enter Lewis's port.What is the preferred method to combat the free-rider problem

Accepted Answer

Charging Lewis a usage fee aligns the benefits received by Lewis's port with the costs of maintaining the lighthouse, addressing the free-rider problem.

Question 2

The town of Turner Valley does not have any public snow plows.Anyone who wants their street cleared of snow must hire a private snow plow company to do it for $75.Shelby,Ravi,and Mandy all live on a dead-end street,with Shelby living at the very end of it.Each one values snow removal at $50.At present,the snow is never cleared from the street.What can we conclude

Accepted Answer

If Shelby, Ravi, and Mandy acted collectively, they could split the cost of the snow removal and each pay less than $75. This would make snow removal affordable for all of them and provide a mutually beneficial solution. Waiting for Shelby to pay for it alone (option B) is not fair to Shelby and may not happen, while the current situation (option A) does not solve the problem for any of them. Option C assumes that the fee is too high without any context of the cost of operating a snow plow business.

Question 3

Why is a cost-benefit analysis of a highway difficult to conduct

Accepted Answer

The difficulty in conducting a cost-benefit analysis for a highway stems from the challenge of quantifying the benefits, as there is no direct market price to assess the value of the highway's impact on factors like travel time savings, economic development, and environmental effects.

Question 4

What is the proper method to fight poverty in a society

Accepted Answer

Taxing the wealthy and redistributing the income can help raise living standards for the poor and potentially benefit everyone. This can be done through programs such as social welfare, education, and healthcare. However, it is important to ensure that these programs do not create disincentives for individuals to work and innovate.

Option B is incorrect because eliminating taxes aimed at redistributing income may actually widen the gap between rich and poor and negatively impact the living standards of the poor.

Option C is also incorrect because government intervention can be effective in reducing poverty if done correctly. It can provide essential services and create opportunities for those who are marginalized.

Option D is incorrect because private markets may not provide adequate charity programs for the poor, as they may not have a profit incentive to do so, leading to free-rider problems.

Question 5

When might a lighthouse be considered a private good

Accepted Answer

A private good is a good that is excludable and rivalrous. If the owner of the lighthouse is able to exclude beneficiaries from receiving the benefits of the lighthouse, then it becomes excludable and can be considered a private good.

Question 6

The privately owned school system in Smalltown has a virtually unlimited capacity.It accepts all applicants and operates on both tuition and private donations.Although every resident places value on having an educated community,the school's revenues have suffered lately due to a large decline in private donations from the elderly population.If the private market quantity of education is below the socially desirable quantity,how can Smalltown remedy its problem

Accepted Answer

Since the private market quantity of education is below the socially desirable quantity, the best way to remedy the problem is for the local government to step in and provide subsidies for education. This will allow for the school to continue accepting all applicants and operating on both tuition and private donations while still maintaining an affordable option for all members of the community. Increasing tuition or teacher wages or lowering enrollment will not address the root problem of decreased private donations from the elderly population.

Question 7

When the government decides to build a new highway,the first step is to conduct a study to determine the value of the project.What is the study called

Accepted Answer

Cost-benefit analysis is the study conducted to determine the value of a project, where the benefits of the project are compared to the costs incurred. This analysis helps the government to make informed decisions about the project based on its potential benefits and costs. Hence, the best choice is D.

Question 8

Why it is difficult to use cost-benefit surveys to evaluate government projects

Accepted Answer

Respondents may not have a direct stake in the outcome and thus may not provide truthful or accurate responses, skewing the survey results.

Question 9

Assuming that everyone prefers to live in a society without poverty,what do we know about people who do not donate to private charity

Accepted Answer

People who do not donate to private charity are still benefiting from the generosity of others who do donate. They are essentially free-riding on the charitable efforts of others without contributing themselves. They may or may not be in favor of government-sponsored programs, but their lack of private charitable donations suggests that they are not actively supporting anti-poverty efforts. It is unclear whether they are decreasing the reliance of individuals on antipoverty programs.

Question 10

What is the greatest difficulty with cost-benefit analysis of a public project

Accepted Answer

Determining the value or benefit of a public project is the greatest difficulty with cost-benefit analysis. It is often difficult to quantify and measure the benefits of a project, especially when it comes to intangible benefits such as improved quality of life or environmental impacts. It is also difficult to estimate the future costs and benefits, as well as any externalities that may affect the analysis.

Question 11

Why is simply asking people how much they value a highway not a reliable way of measuring the benefits and costs

Accepted Answer

People who stand to lose from the highway have an incentive to exaggerate their costs to influence decision-making, making the survey results unreliable.

Question 12

The value and cost of goods provided in an economy are easier to determine when those goods are which of the following

Accepted Answer

Private goods are goods that are excludable and rival in consumption. This means that individuals can be excluded from using them and their use by one person prevents their use by another. Private goods have clear ownership and can be bought and sold in markets, making it easier to determine their value and cost in the economy.

Question 13

When are externalities present in a market

Accepted Answer

Externalities are present in a market when private costs differ from social costs. Private costs are the costs that the producer or consumer of a good or service pays, while social costs refer to the full costs to society, including externalities such as pollution or traffic congestion. When private costs do not reflect social costs, there is a market failure and resources may be allocated inefficiently. Choices A, B, and D are not correct because they do not necessarily indicate the presence of externalities in a market.

Question 14

Why has a lighthouse long been considered an example of a public good

Accepted Answer

A lighthouse is considered a public good because it provides a non-excludable benefit to all passing ships, regardless of whether they pay for it or not. It is also a good example of a natural monopoly, as there is typically only one lighthouse nearby to provide this service. Therefore, choices A, B, and C are incorrect.

Question 15

Suppose that you want to put on a parade in your home town of 1000 people.The cost of the parade is $6000 and each person values the parade at $5.After a month,you have only sold 50 tickets at $5 each.What is the result

Accepted Answer

At $5 per person, you need at least 1200 people to buy tickets in order to cover the cost of the parade ($6000 / $5 = 1200). Since only 50 tickets have been sold after a month, it is unlikely that enough people will buy tickets to cover the cost. Therefore, neither you nor the local government should put on the parade to avoid financial loss.

Question 16

Why are most lighthouses operated by the government

Accepted Answer

Lighthouses are typically operated by the government due to the free-rider problem, where private entities would not have the incentive to maintain them since they cannot easily charge ships for their use, yet all ships benefit from their presence.

Question 17

Why do private markets usually fail to provide lighthouses

Accepted Answer

Private markets usually fail to provide lighthouses because ship captains have incentives to use lighthouses without paying. Lighthouses are public goods, which means that their benefits cannot be easily excluded from non-paying users (such as ship captains). This creates a free-rider problem, where individuals can benefit from the lighthouse without paying for its construction and maintenance. As a result, private lighthouse owners would not have sufficient revenue to cover their costs and would not be able to compete in the market. Government intervention may be necessary to address this problem and provide lighthouses as a public good. A is incorrect because the benefits of lighthouses can be significant in terms of saving lives and reducing the risks of shipwrecks. B is partially correct, as government intervention may make it more difficult for private lighthouse owners to compete, but this is not necessarily the primary reason for market failure. D is incorrect, as lighthouses continue to be valued by ship captains for navigation and safety purposes.

Question 18

Why does the government provide public goods

Accepted Answer

The government provides public goods because private markets would not produce the efficient quantity of the good. Public goods have the characteristics of non-rivalry and non-excludability, which make it difficult for a private market to produce these goods efficiently. Without government provision, there would likely be underproduction or no production of public goods. The government can ensure that the good is produced in the optimal quantity, with the costs of production spread over the taxpayers, making it more affordable for consumers.

Question 19

Why is cost-benefit analysis important in determining the role of government in our economy

Accepted Answer

Cost-benefit analysis helps determine if the benefits of government intervention in providing a particular good outweigh the costs, thus justifying the role of government in the economy.

Question 20

A lighthouse that primarily benefits a single port owner is most like which type of good

Accepted Answer

A lighthouse that primarily benefits a single port owner is most like a private good because it is excludable and rival in consumption, serving the specific needs of the port owner.

Quiz 11: Public Goods and Common Resources