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Chapter 5: Q 6 (page 120)

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?

Short Answer

Expert verified

The diagram of the nation's market for automobiles is,

The automobile market will fall as people will be using more of public buses.

Step by step solution

01

Step 1. Define externality.

An externality is a consequence of an economic activity that affects the third party. For example, pollution is an externality.

02

Step 2. The market for automobiles

The diagram for the market for automobiles,

The government's policy was to provide subsidies to all bus commuters which would attract a greater amount of the public. Since commuting by bus will be cheap as compared to automobiles so the price and quantity will both decrease for automobiles.

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Most popular questions from this chapter

Describe political functions of government that entail its involvement in economy.

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.

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?

Scans of internal organs using magnetic resonance imaging (MRI) devices are often covered by subsidized health insurance programs such as Medicare. Consider the following table illustrating hypothetical quantities of individual MRI testing procedures demanded and supplied at various prices, and then answer the questions that follow.

Price	Quantity Demanded	Quantity Supplied
\(100	100,000	40,000
\)300	90,000	60,000
\(500	80,000	80,000
\)700	70,000	100,000
\(900	60,000	120,000

(a) In the absence of a government-subsidized health plan, what is the equilibrium price of MRI tests? What is the amount of society’s total spending on MRI tests?

(b) Suppose that the government establishes a health plan guaranteeing that all qualified participants can purchase MRI tests at an effective price (that is, out-of-pocket cost) to the individual of \)100 per test. How many MRI tests will people consume?

(c) What is the per-unit price that induces producers to provide the amount of MRI tests demanded at the government-guaranteed price of $100? What is society’s total spending on MRI tests?

(d) Under the government’s coverage of MRI tests, what is the per-unit subsidy it provides? What is the total subsidy that the government pays to support MRI testing at its guaranteed price?

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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