Chapter 5: Q. 5.4 (page 100)
Analyze how public spending programs such as Medicare and spending on public education affect consumption incentives.
They improve consumption incentives.
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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?
Why do representatives of taxpayers who fund the NSLP program experience more difficulties in designing effective incentive structures for officials who manage that program than does a company's shareholders who seek to change the incentives confronting firms' managers?
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?
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?)
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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