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1. Which of the following do you consider pure public goods? Private goods? Why? a.

Wilderness area - Wilderness area is an impure public good at some point, consumption becomes nonrival; it is, however, nonexcludable b. Satellite television - Satellite television is nonrival in consumption, although it is excludable; therefore it is an impure public good. c. Medical school education - Medical school education is a private good. d. Public television programs - Television signals - are nonrival in consumption and not excludable (when broadcast over the air). Therefore, they are a public good. e. ATM - An automatic teller machine is rival in consumption, at least at peak times. It is also excludable as only those patrons with ATM cards that are accepted by the machine can use the machine. Therefore the ATM is a private good. 2. Indicate whether each of the following statements is true, false, or uncertain, and justify your answer. a. Efficient provision of a public good occurs at the level at which each of the member of society places the same value on the last unit. - False. Efficient provision of a public good occurs at the level where total willingness to pay for an additional unit equals the marginal cost of producing the additional unit. b. If a good is nonrival and excludable, it will never be produced by the private sector - False. Due to the free rider problem, it is unlikely that a private business firm could profitably sell a product that is non-excludable. However, recent research reveals that the free rider problem is an empirical question and that we should not take the answer for granted. Public goods may be privately supported through volunteerism, such as when people who attend a fireworks display voluntarily contribute enough to pay for the show. c. A road is nonrival because one persons use of it does not reduce another persons use of it. - Uncertain. This statement is true if the road is not congested, but when there is heavy traffic, adding another vehicle can interfere with the drivers already using the road. d. Larger communities tend to consume greater quantities of a non rival good than smaller communities- False. There will be more users in larger communities, but all users have access to the quantity that has been provided since the good is nonrival, so there is no reasons larger communities would necessarily have to provide a larger quantity of the nonrival good 3. Tarzan and Jane live alone in the jungle and have trained Cheetah both to patrol the perimeter of their clearing and to harvest tropical fruits. Cheetah can collect 3 pounds of fruit an hour and currently spends 6hours patrolling, 8 hours picking, and 11 hours sleeping. a. What are the public goods and private goods in this example? The public good is patrol; the private good is fruit. a. If Tarzan and Jane are each currently willing to give up one hour of patrol for 2 pounds of fruit, is the current allocation of Cheetahs time Pareto 1

efficient? Should he patrol less or more? Recall that efficiency requires MRSTARZAN + MRSJANE = MRT. MRSTARZAN = MRSJANE = 2. But MRT = 3. Therefore, MRSTARZAN + MRSJANE MRT. To achieve an efficient allocation, Cheetah should patrol more. 4. In 2118, the US government spent about 6116 million on the search for extraterrestrial intelligence (SETI). Is such research a public good? Is it sensible for the government to pay for such research? The Search for Extra-Terrestrial Intelligence is a public good because it is nonrival and presumably non-excludable. The government should pay for the research only if the SMB is greater than the SMC. 5. Suppose that there are only two fishermen, Zach and Jacob, who fish along a certain coast. They would each benefit if lighthouses were built along the coast where they fish. The marginal cost of building each additional lighthouse is 6111. The marginal benefit of Zach of each additional lighthouse is 01-Q, and the marginal benefit to Jacob is 41Q, where Q equals the number of lighthouses. a. Explain why we might not expect to find the efficient number of lighthouses along this coast. - Zachs marginal benefit schedule shows that the marginal benefit of a lighthouse starts at 601 and declines, and Jacobs marginal benefit starts at 641 and declines. Neither person values the first lighthouse at its marginal cost of 6111, so neither person would be willing to pay for a lighthouse acting alone. b. What is the efficient number of lighthouses? What would be the net benefits to Zach and Jacob if the efficient number were provided? Zachs marginal benefit is MBZACH=01-Q, and Jacobs is MBJACOB=41-Q. The marginal benefit for society as a whole is the sum of the two marginal benefits, or MB=131-2Q (for Q41), and is equal to Zachs marginal benefit schedule afterwards (for Q>41). The marginal cost is constant at MC=111, so the intersection of aggregate marginal benefit and marginal cost occurs at a quantity less than 41. Setting MB=MC gives 131-2Q=111, or Q=15. Net benefit can be measured as the area between the demand curve and the marginal benefit of the 15th unit. The net benefit is $11215 for each person, for a total of 6225. 6. A lone person fishing at a lake can catch 11 fish per day. Each additional person fishing at the lake reduces the catch per person by one fish per day. If a person would rather stay home then catch fewer than four fish (i.e., the opportunity cost of going to the lake is four fish), how many people will how up each day to fish at the lake? What are the net benefits to society of this outcome? What is the efficient number of people fishing to show up at the lake? Is access to the lake a public good? Each day the private decision of each fisherman would equate private cost with private benefit. Therefore, 7 would show up because then each fisherman would catch four fish. If the fishermen catch less than four fish, then they will stay home. The net benefits to society are 1 fish (the benefit to the seven fishermen is 4 fish (7x4=28) and the cost to society is 4 fish per fisherman (7x4=28)). The efficient number of fishermen to show up at the lake is the number that will maximize social net benefits, which happens where the social marginal benefit equals the social marginal cost. This occurs at four fishermen, where the net social benefits equal 12 fish (4x7 4x4). Access to the lake is an impure public good. It is rival if one fisherman has access to the fish, the others have less access. It is, however, nonexcludable because it is difficult to keep people from fishing at a lake.