Chapter 5: Q. 5.1 (page 100)
Explain how market failures such as externalities might justify economic functions of the government.
Yes.
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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.
Consider a nation with a government that does not provide people with property rights for a number of items and that fails to enforce the property rights it does not assign for the remaining items. Would externality be more or less in this nation than in a country such as the United States? Explain.
Many people who do not smoke cigars are bothered by the odor of cigar smoke. If private contracting is impossible and in the absence of any government involvement in the market for cigars, will too many or too few cigars be produced and consumed? From society’s point of view, will the market price of cigars be too high or too low?
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?
Analyze how public spending programs such as Medicare and spending on public education affect consumption incentives.
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