Bring Together Externalities and Public Goods

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Jan 9, 2024

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AP Microeconomics Page 1 of 2 Assignment: Bring Together Externalities and Public Goods 1. Two interesting public goods are radio and television signals. A. In the U.S., private markets have provided these public goods because a private good is associated with radio and television signals: advertising. Revenue from advertising makes it possible for private firms to provide the public goodsóradio and television broadcasts. Explain why these are public goods. (4 points) Public goods because people don’t have to pay to use it. The radio is for everyone and it is usually free since the advertising revenue of the radio companies cover their costs. The two goods are non-excludable and everyone can listen to the radio. B. How does cable television, which provides television channels to people who pay for a cable into their home, alter the nature of the goods called television signals? Explain how, with the advent of cable, television signals are still like public goods, and how they are more like private goods than they were. (4 points) Exclusive to people who pay for the cable channel and is not available to those who do not pay. This is a private good as companies can make money for the subscription fees and not everyone can access the channels if they don’t pay. It is also a private good as the company has the power to exclude other people, if they wish. 2. A large part of the government's role in the economy is correcting market failures. In each of the following examples, what is the market failure being corrected? For each one, explain why this is a market failure and how the government is correcting it. A. Subsidizing a regional bus system (4 points) Market underproduces, positive externality. If the ride is too expensive, no one will ride. If it is too cheap, no company will want to privatize it because they would lose money. Therefore, the government steps in and since the bus system gives positive externalities to society, the government is willing to support private companies or run the bus system themselves. Furthermore, subsidizing the bus system also helps with the environment, as it is now being less polluted with more people riding the bus. B. Inspecting meat-processing facilities (4 points) The market failure would be the potential for poor quality of meat and the distrust of consumers when they purchase the meat. Without inspections, there could be health harms with these meat-processing facilities, resulting in a negative externality. With the inspection, the government reaffirms to society that the meat is good to eat and promotes trust within the society which actually will result in positive externalities. C. Offering free or subsidized public education (4 points) Free and subsidized public education is correcting the negative externalities of an uneducated citizen body. If citizens are uneducated, they are unlikely to make good choices in society and would not contribute to the nation’s economy. If the government does subsidize education, it will result in positive externalities as now that people are educated, they would benefit society and stimulate the economy. D. Maintaining a military force (4 points) Maintaining a military force will protect all citizens and therefore be a positive externality in

society. Without the military, there could be disorder within the country and there would be a negative externality of chaos. Military is a public good that, if implemented, can have a positive externality on citizens across the country. Positive externalities also include giving the country independence and so the other countries can’t influence them as much. It allows the people in the country to feel more safe and protected. 3. Dave raises puppies in his home in suburban Minneapolis and sells them for $450 each. He has no fixed costs; his marginal costs of production are given below. No. of Puppies Marginal Cost to Dave Social Marginal Cost 1 $100 275 2 $200 375 3 $300 475 4 $400 575 5 $500 675 6 $600 775 7 $700 875 The problem is that Dave's neighbors don't want to live around so many puppies. In fact, they suffer $175 worth of damage from each dog Dave raises. A. If Dave is free to raise as many puppies as he likes, how many will he want to raise? Draw a graph showing Dave's marginal cost and marginal revenue from raising puppies. Indicate on your graph and explain in words how many puppies Dave will raise. (4 points) Dave will get puppies where the MC equals MB. 4.5 puppies in the graph is when the two are about equal and since Dave can’t have half a puppy, he will raise 4 puppies. B. If you add Dave's marginal cost and the marginal damage done to his neighbors (another way of saying the marginal cost imposed on his neighbors), you get the social marginal cost (SMC) of raising puppies. This represents the total cost to the community of raising one more puppy. Fill in the column in the table above, and then draw the SMC curve on your graph. (4 points)

No. of Puppies Marginal Cost to Dave Social Marginal Cost SMC 1 $100 275 2 $200 375 3 $300 475 4 $400 575 5 $500 675 6 $600 775 7 $700 875 C. From the point of view of society (which, in this case, will include Dave, the people who buy his puppies, and his neighbors), what is the proper number of puppies to raise and sell? Explain in words and show on your graph. (4 points)

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Maximum benefit for society is when SMC intersects MB. As you can see from the graph, this is at like 2 puppies. 4. Driving an automobile generates many negative externalities. For example, driving creates pollution, since cars emit noxious chemicals when they're driven. Another example is traffic congestion; when one person drives, that increases traffic congestion for everyone else. Governments may try to limit the effect of these externalities in a variety of ways. A. The two negative externalities listed above, air pollution and traffic congestion, are more and less severe at different times or in different places. What conditions make each of these more or less severe? (4 points) Rush hour can make traffic congestion a lot worse and in that case, it will cause serious negative externality. Being in a city can cause more air pollution since there are less trees around and more cars are burning fuels. In that case, pollution is a very bad negative externality. Pollution can also be especially worse in raining seasons. B. Discuss the effectiveness of each of the following policies intended to reduce the amount people drive or the severity of the external damage they create. I. Use a supply and demand graph for gasoline to analyze the effect of a $1.00 per gallon tax on gasoline. Then explain how this affects the negative externalities created by driving. (4 points)

The tax implemented will cause the price of gasoline to rise up and as a result there will be less movements of vehicles traveling and this could help stop traffic congestion. It will make traveling more expensive, which means people will drive less. II. Show on a supply and demand graph for car licenses the effect of an increase in the annual licensing fee from $50 to $100 a car. Explain how this effects the negative externalities created by driving. (4 points) This increases the fixed cost of driving, and will not really change the amount of how much people drive since the change of fee is so low. The marginal cost of driving does not change at all, but the fixed cost is slightly changed. Once they pay the fee of license, they will still drive as much as they want since the price of gasoline remains the same. So, demand and supply does not change.

III. Use a marginal benefit/marginal cost graph for bridge use to analyze the effect of a toll on a popular and crowded bridge, given that the toll is charged at all times of day. Assume that the marginal cost for using the bridge is just the toll charge. Explain how this effects the negative externalities created by driving. (4 points) Several negative externalities can occur from using the marginal benefit and marginal cost graph as a bridge for analysis. First, it could cause cars to choose a longer way to get around the pose which would further pollute the environment as people have to drive longer. In this scenario, the negative externalities can actually become worse. Scenario 2, however has negative externalities becoming better. People will choose to carpool and drive less because of the additional costs and this could help the environment. Furthermore, the money collected could go to environmental projects to help the environment which would be a positive change. IV. Explain in words how your answer to part III would be different if the toll was charged only during crowded times of day (commute hours)? (4 points) The same thing could happen. People would still try to find ways around the route and further pollute the environment. However, people could also do the same thing and carpool in order to save cost and this would reduce the negative externalities. However, if it is only charged during crowded times, the overall pollution is more because people will choose to drive more when it is not commute hours. It would be better to reduce pollution if the toll is there all the time, instead of only during commute hours. V. Explain in words how your answer to part III would be different if the toll was on a rural interstate rather than an urban bridge. (4 points) Less cars would go through meaning less money that could be redistributed in helping the environment. However, it also means that there is less pollution as there are simply less cars in rural areas than in urban areas. People will probably not avoid the toll as there isn't much traffic and they would carpool and go through together. This will help combat negative externalities in the rural area as well. Overall, it will reduce the negative externality less

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because urban areas have more cars than rural areas. Generally speaking, it is more effective to have the poll in an urban bridge because it will stop more pollution but if it was placed in an urban area, it certainly can stop pollution as well.

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