Chapter 13: Q.16 (page 316)
Explain why the federal government funds national defense.
The federal government pays national defense to avoid the problem of free riders.
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Will the demand for borrowing and investing in R&D be higher or lower if there are no external benefits?
HighFlyer Airlines wants to build new airplanes with greatly increased cabin space. This will allow HighFlyer Airlines to give passengers more comfort and sell more tickets at a higher price. However, redesigning the cabin means rethinking many other elements of the airplane as well, like engine and luggage placement, and the most efficient shape of the plane for moving through the air. HighFlyer Airlines has developed a list of possible methods to increase cabin space, along with estimates of how these approaches would affect the plane's operating costs and ticket sales. Based on these estimates, Table 13.5 shows the value of R&D projects that provide at least a certain private rate of return. Column 1 = Private Rate of Return. Column 2 = Value of R&D Projects that Return at Least the Private Rate of Return to HighFlyer Airlines. Use the data to answer the following questions.
| Private rate of return | Value of R&D |
| 12% | \(100 |
| 10% | \)200 |
| 8% | \(300 |
| 6% | \)400 |
| 4% | $500 |
a. If the opportunity cost of financial capital for HighFlyer Airlines is 6%, how much should the firm invest in R&D?
b. Assume that the social rate of return for R&D is an additional 2% on top of the private return; that is, an R&D investment that had a 7% private return to HighFlyer Airlines would have a 9% social return. How much investment is socially optimal at the 6% interest rate?
Do market demand curves reflect positive externalities? Why or why not?
Is it inevitable that government must become
involved in supporting investments in new technology?
Suppose that Sony's R&D investment in digital devices has increased profits by 20%. Is this a private or social benefit?
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