Chat with AIExam 4: Part A: Market Failures: Public Goods and Externalities
Explain the difference between a public and private good.Describe the rationale behind supply and demand analysis for public goods.
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VerifiedA public good is one, which is not subject to rivalry and one for which the exclusion principle does not apply.With a private good, the market demand is determined by adding the quantities demanded people are willing to buy at each possible price whereas with a public good, the collective demand is found by adding together the prices people are willing to pay for the last unit of the public good at each possible quantity demanded.The demand curve for a public good slopes downward because of the law of diminishing marginal utility.The supply curve for a public good is upward sloping because of the law of diminishing returns.The demand curve for a public good is, in essence, a marginal benefit curve; the supply curve for a public good reflects rising marginal costs.The optimal quantity of a public good is found at the intersection of the collective demand and supply curves where the marginal benefit of the last unit equals that unit's marginal cost.
The following table shows marginal costs and benefits of the optimal quantity of pollution abatement that will occur at a local factory. 
(a) What is the optimal level of pollution abatement? Why?
(b) If the marginal benefit of pollution abatement were to increase by $150,000 at each level because of the factory's desire to improve its image and environment, what would the optimal level be? Why?
(c) What might cause the optimal level of pollution abatement to be 120 tonnes?
(a) What is the optimal level of pollution abatement? Why?
(b) If the marginal benefit of pollution abatement were to increase by $150,000 at each level because of the factory's desire to improve its image and environment, what would the optimal level be? Why?
(c) What might cause the optimal level of pollution abatement to be 120 tonnes? (40) Verified(a) 140 tonnes because the marginal cost of pollution abatement just equals the marginal benefit of $60,000.
(b) 180 tonnes; MC of $180,000 equals MB of $180,000.
(c) If marginal costs increased by $50,000 or the marginal benefit declined by $50,000.
How does the market demand curve for a public good differ from the market demand curve for a private good?
(43) VerifiedThe demand curve for the private good is an accurate reflection of what people are willing to pay for a quantity of the good.In contrast, the demand curve for a public good understates the true preferences of citizens.The free rider problem with a public good means that people who received the benefits of a public good do not always have to pay for the good.Once the public good is provided for one person, it is available to all.Thus, some citizens may not be willing to voluntarily pay for the public good, and as a result, people's true preferences for a public good will be understated or even nonexistent even when the collective benefits outweigh the relevant costs.
Furthermore, the market demand curve for a private good is the horizontal sum of the individual demand curves for the good.On the other hand, since a public good is characterized by non-rivalry, its collective demand is the vertical sum of individual demand curves.
Draw a supply and demand graph on the below diagram that illustrates the market for pollution rights.Label the axes and curves.Then show what happens to price and quantity when the demand for pollution rights increases in the market. 
(35) Describe how a market for externality rights would work in terms of supply and demand.
(36) Evaluate.Economy in government requires that government minimize its spending.
(36) Draw a market supply curve and indicate the following:
(a) The market price;
(b) The quantity supplied;
(c) The minimum amount that sellers are willing to accept for the quantity supplied;
(d) The actual amount that sellers receive for providing the quantity supplied;
(e) The producer surplus from providing the quantity supplied. 
(30) Demand is represented by the equation, P = 20 - 0.2QD and supply by the equation P = 5 + 0.1QS.(a) Suppose this market produces 40 units of output.What price would this output be sold at? What is the marginal benefit to society of the 40th unit? What is the marginal cost of the 40th unit?
(b) What is consumer surplus if the market produces 40 units of output? What is producer surplus? What is the sum of consumer and producer surplus?
(c) What are the equilibrium price and quantity?
(d) What is consumer surplus at equilibrium? What is producer surplus? What is the sum of consumer and producer surplus?
(e) Is allocative efficiency achieved when the market produces 40 units of output? Explain in three different ways.
(37) Supply in a market is represented by the equation, P = 20 + .1QS.Suppose the market price is $30.(a) How many units do sellers wish to provide in this market?
(b) What is the minimum amount that sellers are willing to accept for this quantity of output?
(c) What is the actual amount that sellers receive for providing for this quantity of output?
(d) What is the producer surplus that sellers obtain for providing this quantity of output?
(34) What are negative and positive externalities? How do they affect supply and demand curves?
(41) Demand in a market is represented by the equation, P = 30 - .5QD.Suppose the market price is $18.(a) How many units do buyers wish to purchase in this market?
(b) What is the maximum amount that the buyers are willing to pay for this quantity of output?
(c) What is the actual amount that buyers have to pay for this quantity of output?
(d) What is the consumer surplus that buyers obtain from purchasing this quantity of output?
(47) Demand in a market is represented by the equation, P = 50 - QD.Suppose the market price is $30.(a) How many units do buyers wish to purchase in this market?
(b) What is the maximum amount that the buyers are willing to pay for this quantity of output?
(c) What is the actual amount that buyers have to pay for this quantity of output?
(d) What is the consumer surplus that buyers obtain from purchasing this quantity of output?
(41) What are quasi-public goods and why does the government provide them?
(31) Evaluate: "Pollution is undesirable.Therefore, all pollution should be banned."
(40) What resource problem is created by positive externalities and what methods are suggested for dealing with this problem?
(39) Demand is represented by the equation, P = 200 - 2QD and supply by the equation P = 25 + 3QS.(a) Suppose this market produces 30 units of output.What price would this output be sold at if consumers we going to buy all goods? What is the marginal benefit to society of the 30th unit? What is the marginal cost of the 30th unit?
(b) What is consumer surplus if the market produces 30 units of output? What is producer surplus? What is the sum of consumer and producer surplus?
(c) What are the equilibrium price and quantity?
(d) What is consumer surplus at equilibrium? What is producer surplus? What is the sum of consumer and producer surplus?
(e) Is allocative efficiency achieved when the market produces 30 units of output? Explain in three different ways.
(32) How do direct controls and specific taxes affect negative externalities? Briefly explain in terms of supply and demand.
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