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Chapter 5: Q 9 (page 120)

Displayed in the diagram below are conditions in the market for residential Internet access in a U.S. state. The government of this state has determined that access to the Internet improves the learning skills of children, which it has concluded is an external benefit of Internet access. The government has also concluded that if these external benefits were to be taken into account, 3 million residents would have Internet access. Suppose that the state government’s judgments about the benefits of Internet access are correct and that it wishes to offer a per-unit subsidy just sufficient to increase total Internet access to 3 million residences. What per-unit subsidy should it offer? Use the diagram to explain how providing this subsidy would affect conditions in the state’s market for residential Internet access.

Short Answer

Expert verified

The per-unit subsidy that the government should offer is $$ 20$ to the internet service providers.

Step by step solution

01

Step 1. Define External Benefits.

External benefits are positive externalities that are beneficial for the economy.

02

Step 2. The per-unit subsidy.

The current rate for Internet access is $$ 30$ and the number of users was 2 million. If the government wants to increase the number of users to 3 million the rate of Internet access has to be brought down to $$ 20$ at which rate the suppliers could supply only 1 million users with Internet access. Since the effective price for suppliers to reach 3 million is $40 the government would have to provide a subsidy of $$ 20$ per unit to the providers in order to increase the user base to 3 million at a rate of $$ 20$ .

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Most popular questions from this chapter

An online video game has the technical capability for a large number of players to participate, as long as the game administrator works to ensure the constant functionality of the game. Adding more players deprives no other participants of the entertainment services provided by the online game. It has been easy, however, to set up a system for excluding participation by anyone who fails to contribute $5 per month to a fund that ensures covering extra expenses generated by that player's participation. Is this game a public good?

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.

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?

Suppose that the current price of a tablet device is \(300 and that people are buying 1 million devices per year. The government decides to begin subsidizing the purchase of new tablet devices. The government believes that the appropriate price is \)260 per tablet, so the program offers to send people cash for the difference between \(260 and whatever the people pay for each tablet they buy.

(a) If no consumers change their tablet-buying behavior, how much will this program cost the taxpayers?

(b) Will the subsidy cause people to buy more, fewer, or the same number of tablets? Explain.

(c) Suppose that people end up buying 1.5 million tablets once the program is in place. If the market price of tablets does not change, how much will this program cost the taxpayers?

(d) Under the assumption that the program causes people to buy 1.5 million tablets and also causes the market price of tablets to rise to \)320, how much will this program cost the taxpayers?

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?

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