Use the table below, which shows the demand for a public good in an economy consisting of two households, A and B, to answer the questions below. Price ($) Quantity demanded Quantity demanded a. What would make you doubt that the table is an accurate reporting of the individual demand curves? A B $4 12 4 $6 10 3 $8 $10 8 6 2 1 $12 $14 $16 4 2 0 0 O 0 There is no good reason why household A would demand so much more of a public good than household B. This suggests that household A is a free rider. O Since people do not directly pay for public goods, they will tend to understate the value they receive from those goods. O When individuals determine how much of a public good to demand, they estimate their marginal private benefit rather than the marginal social benefit. This causes them to understate the value that is received from a public good. O Since people do not directly pay for public goods, they will tend to overstate the value they receive from those goods. b. If the marginal cost of providing 1 unit of the public good is $16.00, the socially optimal amount of the public good is c. Given the free rider problem, your answer to part b. is most likely an overestimate unit(s).

Use the table below, which shows the demand for a public good in an economy consisting of two households, A and B, to answer the questions below. Price ($) Quantity demanded Quantity demanded a. What would make you doubt that the table is an accurate reporting of the individual demand curves? A B $4 12 4 $6 10 3 $8 $10 8 6 2 1 $12 $14 $16 4 2 0 0 O 0 There is no good reason why household A would demand so much more of a public good than household B. This suggests that household A is a free rider. O Since people do not directly pay for public goods, they will tend to understate the value they receive from those goods. O When individuals determine how much of a public good to demand, they estimate their marginal private benefit rather than the marginal social benefit. This causes them to understate the value that is received from a public good. O Since people do not directly pay for public goods, they will tend to overstate the value they receive from those goods. b. If the marginal cost of providing 1 unit of the public good is $16.00, the socially optimal amount of the public good is c. Given the free rider problem, your answer to part b. is most likely an overestimate unit(s).

Principles of Microeconomics

7th Edition

ISBN:9781305156050

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter6: Supply, Demand And Government Policies

Section: Chapter Questions

Problem 10PA

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