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 government offers to let a number of students at a public school transfer to a private school under two conditions: It will transmit to the private school the same per-pupil subsidy it provides the public school, and the private school will be required to admit the students at a below-market net tuition rate. Will the economic outcome be the same as the one that would have arisen if the government instead simply provided students with grants to cover the current market tuition rate at the private school? (Hint: Does it matter if schools receive payments directly from the government or from consumers?)
Suppose that repeated application of a pesticide used on orange trees causes harmful contamination of groundwater. The pesticide is applied annually in almost all of the orange groves throughout the world. Most orange growers regard the pesticide as a key input in their production of oranges.
(a) Use a diagram of the market for the pesticide to illustrate the implications of a failure of orange producers’ costs to reflect the social costs of groundwater contamination.
(b) Use your diagram from part (a) to explain a government policy that might be effective in achieving the amount of orange production that fully reflects
all social costs.
Suppose the panel (a) of the figure applies to Pennsylvania's steel market. Suppose that steel manufacturer in this state adopts a new technique for producing steel that entails a smaller external cost. In the absence of any government action to correct the negative externality from steel production, would the overallocation of resources to steel production in Pennslyvania be larger or smaller following the adoption of the next steel-manufacturing technique?
After a government implements a voucher program, granting funds that families can spend at schools of their choice, numerous students in public schools switch to private schools. Parents’ and students’ valuations of the services provided at both private and public schools adjust to equality with
the true market price of educational services. Is anyone likely to lose out nonetheless? If so, who?
How might the federal or state governments act to try to boost the external benefits arising from inoculations against the measles virus?
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