Chapter 5: Q. 5.2 (page 100)
Distinguish between private goods and public goods and explain the nature of the free-rider problem.
Private are owned and public goods are for all.
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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.
Many economists suggest that our nation's legal system is an example of a public good. Does the legal system satisfy the key properties of public good? Explain your reasoning.
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?
Given that even the tiniest bit of fast-traveling space junk, such as a fleck of paint, can damage a satellite or pierce the thin covering of a spaceship why might the IADC Committee experience problems determining the "appropriate level of orbital pollution?
Now draw a diagram of the market for oranges. Explain how the government policy you discussed in part (b) of Problem 5-2 is likely to affect the market price and equilibrium quantity in the orange market. In what sense do consumers of oranges now “pay” for dealing with the spillover costs of pesticide production?
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