Chapter 5: Q 1 (page 116)
How does a city's decision to assess substantial fines on rail operators that persistently generate traffic congestion affect the supply curve for rail services within the city?
The supply curve for rail services within the city is shifted leftward.
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Distinguish between private goods and public goods and explain the nature of the free-rider problem.
Would a government find it easier or harder to raise funds for a public good that all people value similarly but that current government officials possess varying capabilities to provide?
Scans of internal organs using magnetic resonance imaging (MRI) devices are often covered by subsidized health insurance programs such as Medicare. Consider the following table illustrating hypothetical quantities of individual MRI testing procedures demanded and supplied at various prices, and then answer the questions that follow.
| Price | Quantity Demanded | Quantity Supplied |
| \(100 | 100,000 | 40,000 |
| \)300 | 90,000 | 60,000 |
| \(500 | 80,000 | 80,000 |
| \)700 | 70,000 | 100,000 |
| \(900 | 60,000 | 120,000 |
(a) In the absence of a government-subsidized health plan, what is the equilibrium price of MRI tests? What is the amount of society’s total spending on MRI tests?
(b) Suppose that the government establishes a health plan guaranteeing that all qualified participants can purchase MRI tests at an effective price (that is, out-of-pocket cost) to the individual of \)100 per test. How many MRI tests will people consume?
(c) What is the per-unit price that induces producers to provide the amount of MRI tests demanded at the government-guaranteed price of $100? What is society’s total spending on MRI tests?
(d) Under the government’s coverage of MRI tests, what is the per-unit subsidy it provides? What is the total subsidy that the government pays to support MRI testing at its guaranteed price?
Explain how market failures such as externalities might justify economic functions of the government.
Suppose that the current price of a tablet device is \(300 and that people are buying 1 million devices per year. The government decides to begin subsidizing the purchase of new tablet devices. The government believes that the appropriate price is \)260 per tablet, so the program offers to send people cash for the difference between \(260 and whatever the people pay for each tablet they buy.
(a) If no consumers change their tablet-buying behavior, how much will this program cost the taxpayers?
(b) Will the subsidy cause people to buy more, fewer, or the same number of tablets? Explain.
(c) Suppose that people end up buying 1.5 million tablets once the program is in place. If the market price of tablets does not change, how much will this program cost the taxpayers?
(d) Under the assumption that the program causes people to buy 1.5 million tablets and also causes the market price of tablets to rise to \)320, how much will this program cost the taxpayers?
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