Question 1

In our study of monopoly,we found that monopolists can increase profit by segmenting the market and price discriminating (under third degree price discrimination).Now suppose a firm is producing an excludable local public good.Can you justify a form of such market segmentation and price discrimination as efficient?

Accepted Answer

If a firm (like a movie theater)produces a local public good and can exclude non-payers,and if the firm furthermore knows how to segment consumer types into high and low demand types,then a form of third degree price discrimination can mimic Lindahl price discrimination.High demanders are charged a higher (Lindahl)price while low demanders are charged a low price.

Question 2

Suppose a social entrepreneur needs to raise money for a public good.He has to allocate his fund raising package to activities that persuade people of the importance of the public good and to activities that make people feel good about giving.As the population gets large,which of these do you think he will increasingly emphasize?

Accepted Answer

As the population gets large,the free rider problem becomes larger -- which means that just convincing someone that the public good is important won't raise much money.But making someone feel good about giving is all about generating private benefits from giving -- and that is unaffected by how many individuals there are.Thus,one would expect the fund raising to increasingly focus on making people feel good about giving rather than persuading them of the importance of the public good.

Question 3

Suppose you run a charity that raises money for a worthy public good.Your donors may be concerned about how much of each dollar that is raised is put back into more fund-raising.
a.Suppose the marginal product of a dollar put into fundraising is initially increasing but eventually diminishing.How much will the last dollar spend on fundraising raise?
b.If everyone considers their own contribution to this charity as the marginal contribution,what will be their impression of how much they are really helping the public good?
c.Would you expect your answer to (b)to make it harder for you to raise money for your charity?
d.How might your answer to (c)explain why some charities make a point of informing people that they have placed a cap on their fund raising budget -- or that they have placed a cap on how many people will be approached during the fund raising campaign?

Accepted Answer

a.The last dollar spent will raise about a dollar.
 b.Their impression will be that 100% of their contribution is being put into fund-raising,and none into the public good.
 c.One would expect that this makes fund-raising harder.
 d.One way around the problem is to signal that you will stop fund-raising before you get to the point where the marginal product of a dollar is a dollar.You can do this in either of the proposed ways.

Question 4

Suppose some people like national defense and others are offended by it -- i.e.some people derive positive marginal benefit and others derive negative marginal benefit.Efficiency then demands that national defense is produced until the sum of the positive marginal benefits is equal to the (absolute value)of the negative marginal benefits.

Accepted Answer

Efficiency would still demand that the sum of all marginal benefits is equal to that marginal cost.

Question 5

Public goods arise because of externalities.

Accepted Answer

Non-rivalry means that one person's consumption can be another person's consumption too -- i.e.one person's consumption gives rise to a positive externality for another.

Question 6

Consider a game where individuals are asked to contribute to a public good.Then consider the best response function for individual i,with individual i's contribution measured on the vertical axis and "the average contribution by everyone else" on the horizontal.Then as the number of individuals increases,i's best response function shifts in.

Accepted Answer

It rotates inward,with the vertical intercept remaining constant.

Question 7

In a game where individuals are asked to contribute to a public good,best response functions slope down because each individual believes the other will not give very much.

Accepted Answer

Best response functions slope down because each individual will only give until the private marginal benefit of an additional dollar of the public good is equal to a dollar -- and as the other individual gives more,this implies less giving leads to the last dollar satisfying this condition.

Question 8

If everyone has identical preferences over public goods,Lindahl prices for providing the efficient level of the public good will be the same for everyone.

Accepted Answer

Unless tastes are quasilinear in the public good,people with different incomes will be charge different Lindahl prices.

Question 9

The optimal subsidy for private giving to a public good increases as the number of people benefiting from the public good increases.

Accepted Answer

The optimal subsidy is equal to the sum of the marginal benefits of a dollar of giving for everyone other than the "giver" -- which increases as the number of "others" increases.

Question 10

If a public good is financed through Lindahl prices,those whose total willingness to pay for the public good is high will end up paying a higher Lindahl price than those whose total willingness to pay for the public good is low.

Accepted Answer

The statement is true if "total" is replaced by "marginal".

Question 11

Tiebout local public good provision is more easily implemented than a Lindahl equilibrium -- because people know each other's tastes locally and can more easily come up with the right way to divide the cost for public goods.

Accepted Answer

The Tiebout public good equilibrium does not rely on people knowing each other's tastes --- rather it depends on people sorting into communities based on each others' tastes.

Question 12

We say that individuals get a "warm glow" from giving to a public good if they not only get utility from the public good but also from giving itself.Explain the following: "While warm glow lessens the free rider problem,it cannot eliminate it."

Accepted Answer

The answer of We say that individuals get a "warm...

Question 13

Any efficient allocation of public goods will be such that the sum of the marginal benefits is equal to the marginal cost -- but the level of the public good may differ depending on how income is distributed in the population.

Accepted Answer

Unless tastes are quasilinear in the public good,redistribution of income gives rise to income effects that will cause the demands (and MWTP)for public goods to shift.

Question 14

If the formation of Lindahl prices to support an efficient level of public goods is derived from individuals' reporting their marginal willingness to pay,people will under-report their true willingness to pay.

Accepted Answer

Under Lindahl prices,everyone is charged their marginal willingness to pay -- but the overall level of the public good is determined by the sum of all MWTPs.Thus,by underreporting your MWTP,you can lower your Lindahl price without affecting the public good level much.The more individuals there are,the less the public good level will change -- and so the incentive to lie increases as the number of people increases.

Question 15

When the government contributes to a public good,private contributions will fall.

Accepted Answer

Government contributions crowd out private contributions.

Question 16

Our free-rider model of voluntary giving suggests that,when the government subsidizes private giving to charity,it's contribution will simply "crowd out" the private contributions so long as no one is at a corner solution.

Accepted Answer

When the government subsidizes private giving,it lowers the price of giving -- which is different than when the government contributes directly (when crowd out can happen.)

Question 17

If giving to public goods is subsidized through deductions under a progressive income tax,the government subsidizes public goods consumed by higher income individuals at greater rates than public goods consumed by lower income individuals.

Accepted Answer

Under a progressive income tax,higher income individuals face a greater marginal tax rate -- and their deductions therefore receive a higher subsidy.

Question 18

What problem are mechanism designers attempting to overcome when they "design mechanisms" to provide public goods?

Accepted Answer

The answer of What problem are mechanism designers attempting to...

Question 19

If private giving to public goods involves externalities,what is a Pigouvian solution to the public goods problem?

Accepted Answer

The answer of If private giving to public goods involves...

Quiz 27: Public Goods