Chapter 5: Q 2 (page 118)
How might the federal or state governments act to try to boost the external benefits arising from inoculations against the measles virus?
The government can grant special privileges to those with the measles vaccination such as subsidized air tickets, and complimentary food.
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A nation’s government has determined that mass transit, such as bus lines, helps alleviate traffic congestion, thereby benefiting both individual auto commuters and companies that desire to move products and factors of production speedily along streets and highways. Nevertheless, even though several private bus lines are in service, the country’s commuters are failing to take the social benefits of the use of mass transit into account.
(a) Discuss, in the context of demand-supply analysis, the essential implications of commuters’ failure to take into account the social benefits associated with bus ridership.
(b) Explain a government policy that might be effective in achieving the socially efficient use of bus services.
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?
Analyze how public spending programs such as Medicare and spending on public education affect consumption incentives.
Draw a diagram of this nation’s market for automobiles, which are a substitute for buses. Explain how the government policy you discussed in part (b) of Problem 5-5 is likely to affect the market price and equilibrium quantity in the country’s auto market. How are auto consumers affected by this policy to attain the spillover benefits of bus transit?
Displayed in the diagram below are conditions in the market for residential Internet access in a U.S. state. The government of this state has determined that access to the Internet improves the learning skills of children, which it has concluded is an external benefit of Internet access. The government has also concluded that if these external benefits were to be taken into account, 3 million residents would have Internet access. Suppose that the state government’s judgments about the benefits of Internet access are correct and that it wishes to offer a per-unit subsidy just sufficient to increase total Internet access to 3 million residences. What per-unit subsidy should it offer? Use the diagram to explain how providing this subsidy would affect conditions in the state’s market for residential Internet access.
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