Chapter 13: Q.15 (page 316)
What is the free rider problem?
Free riders are those who want other people to fund a public good and then intend to use it themselves.
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Is it inevitable that government must become
involved in supporting investments in new technology?
Do market demand curves reflect positive externalities? Why or why not?
The Junkbuyers Company travels from home to home, looking for opportunities to buy items that would otherwise end up with the garbage, but which the company can resell or recycle. Which will be larger, the private or the social benefits?
Why might private markets tend to provide too few incentives for the development of new technology?
The Gizmo Company is planning to develop new household gadgets. Table 13.4 shows the company’s demand for financial capital for research and development of these gadgets, based on expected rates of return from sales. Now, say that every investment would have an additional 5% social benefit—that is, an investment that pays at least a 6% return to the Gizmo Company will pay at least an 11% return for society as a whole; an investment that pays at least 7% for the Gizmo Company will pay at least 12% for society as a whole, and so on. Answer the questions that follow based on this information.
| Estimated rate of return | Private profits of the firm from an R&D project (in \( millions) |
| 10% | \)100 |
| 9% | \(102 |
| 8% | \)108 |
| 7% | \(118 |
| 6% | \)133 |
| 5% | \(153 |
| 4% | \)183 |
| 3% | $223 |
a. If the going interest rate is 9%, how much will Gizmo invest in R&D if it receives only the private benefits of this investment?
b. Assume that the interest rate is still 9%. How much will the firm invest if it also receives the social benefits of its investment? (Add an additional 5% return on all levels of investment.)
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