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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Suppose that the U.S. government determines that cigarette smoking creates social costs not reflected in the current market price and equilibrium quantity of cigarettes. A study has recommended that the government can correct the externality effect of cigarette consumption by paying farmers not to plant tobacco used to manufacture cigarettes. It also recommends raising the funds to make these payments by increasing taxes on cigarettes. Assuming that the government is correct that cigarette smoking creates external costs, evaluate whether the study’s recommended policies might help correct this negative externality.
Based on your answer to Question 5-19, if the government aims to correct the positive externality in the inoculation market via a per-unit subsidy to consumers, in the wake of the study, is the appropriate per-unit subsidy higher or lower than before?
A government agency is contemplating launching an effort to expand the scope of its activities. One rationale for doing so is that another government agency might make the same effort and, if successful, receive larger budget allocations in future years. Another rationale for expanding the agency’s activities is that this will make the jobs of its workers more interesting, which may help the government agency attract better-qualified employees. Nevertheless, to broaden its legal mandate, the agency will have to convince more than half of the House of Representatives and the Senate to approve a formal proposal to expand its activities. In addition, to expand its activities, the agency must have the authority to force private companies it does not currently regulate to be officially licensed by agency personnel. Identify which aspects of this problem are similar to those faced by firms that operate in private markets and which aspects are specific to the public sector.
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?
Why do you think that the federal government requires rail operators to mount expensive horns and sound them at prescribed decibel levels at all street crossings?
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