Public Goods, Externalities, and the Role of Government ‹ 163- You learn that one nation has a Gini ratio of .25
and another nation has a Gini ratio of .85. Based
on this you might conclude
(A) the nation with the higher Gini ratio has a
more equal distribution of wealth and
income.
(B) the nation with the higher Gini ratio has a
more unequal distribution of citizens with
college degrees.(C) the nation with the lower Gini ratio has more
societal barriers like discrimination.
(D) the nation with the higher Gini ratio has
fewer societal barriers like discrimination.
(E) the nation with the lower Gini ratio has more
oligopolistic industries.› Answers and Explanations
- E—This vertical distance between society’s
demand curve and the market demand curve rep-
resents spillover benefits, or additional benefits to
society not captured by market demand.
However, it could also be the amount of a pro-
ducer or consumer subsidy if the government
chose to eliminate the externality. - C—A negative externality is a situation where a
third party is harmed by the actions of consumers
and/or producers. The first-grade pool party is
the best candidate for such a situation, as all of
the other choices are likely to benefit you, rather
than impose cost upon you. - A—A public good is a good that is nonrival and
nonexcludable. In other words, if one person
consumes it, all others can still consume it.
4. B—The presence of the negative externality
should rule out any choice that refers to a subsidy
of either producers or consumers of energy. To
reduce consumption and production, we must
reduce the market quantity, not encourage more
of it. Subsidies could be used to encourage more
energy-efficient behavior, but choices A and D
would actually inhibit this kind of action. The
per unit tax on producers of the negative exter-
nality is the most appropriate choice, as the tax
shifts the market supply inward, making it closer
to the socially optimal supply of energy.
5. C—Jennifer’s weekly income is twice Jason’s, yet
she pays less than double his taxes. This is a
regressive tax. A proportional tax would require
Jennifer to pay $400, and a progressive tax would
require that she pay more than $400 in weekly
taxes.
6. B—The distribution of human capital is a factor
in determining the distribution of income and
wealth. A nation that has a more unequal distri-
bution of educational attainment would there-
fore likely have a more unequal distribution of
income.
› Rapid Review
Private goods:Goods that are both rival and excludable. Only one person can consume
the good at a time, and consumers who do not pay for the good are excluded from the
consumption. Examples include a tube of toothpaste or an airline ticket.Public goods:Goods that are both nonrival and nonexcludable. One person’s consump-
tion does not prevent another from also consuming the good, and if it is provided to some,
it is necessarily provided to all, even if they do not pay for the good. Examples are local
police services and national defense.