Summary 777
7.Education is an example of an activity that generates a positive
externality: acquiring more education benefits the individual
student and having a more highly educated workforce is good
for the economy as a whole. The accompanying table illus-
trates the marginal benefit to Sian per year of education and
the marginal cost per year of education. Each year of education
has a marginal external benefit to society equal to $8,000. As-
sume that the marginal social cost is the same as the marginal
cost paid by an individual student.
a.Assume that the marginal cost of producing a tree for
planting is constant at $20. Draw a diagram that shows the
market equilibrium quantity and price for trees to be
planted.
b.What type of externality is generated by planting a tree?
Draw a diagram that shows the optimal number of trees
planted. How does this differ from the market outcome?
c.On your diagram from part b, indicate the optimal Pigou-
vian tax/subsidy (as the case may be). Explain how this
moves the market to the optimal outcome.
9.The government is involved in providing many goods and serv-
ices. For each of the goods or services listed, determine
whether it is rival or nonrival in consumption and whether it is
excludable or nonexcludable. What type of good is it? Without
government involvement, would the quantity provided be effi-
cient, inefficiently low, or inefficiently high?
a.street signs
b.Amtrak rail service
c.regulations limiting pollution
d.an interstate highway without tolls
e.a lighthouse on the coast
10.An economist gives the following advice to a museum director:
“You should introduce ‘peak pricing’: at times when the mu-
seum has few visitors, you should admit visitors for free. And
at times when the museum has many visitors, you should
charge a higher admission fee.”
a.When the museum is quiet, is it rival or nonrival in con-
sumption? Is it excludable or nonexcludable? What type of
good is the museum at those times? What would be the effi-
cient price to charge visitors during that time, and why?
b.When the museum is busy, is it rival or nonrival in con-
sumption? Is it excludable or nonexcludable? What type of
good is the museum at those times? What would be the effi-
cient price to charge visitors during that time, and why?
11.In many planned communities, various aspects of community
living are subject to regulation by a homeowners’ association.
These rules can regulate house architecture; require snow re-
moval from sidewalks; exclude outdoor equipment, such as
backyard swimming pools; require appropriate conduct in
shared spaces such as the community clubhouse; and so on.
Suppose there has been some conflict in one such community
because some homeowners feel that some of the regulations
mentioned above are overly intrusive. You have been called in
to mediate. Using what you have learned about public goods
and common resources, how would you decide what types of
regulations are warranted and what types are not?Section 14 SummaryQuantity of Sian’s marginal Sian’s
education benefit marginal cost
(years) per year per year
91011121314151617$20,00019,00018,00017,00016,00015,00014,00013,000$15,00016,00017,00018,00019,00020,00021,00022,000a.Find Sian’s market equilibrium number of years of education.
b.Calculate the marginal social benefit schedule. What is the
socially optimal number of years of education?
c.You are in charge of education funding. Would you use a
Pigouvian tax or a Pigouvian subsidy to induce Sian to
choose the socially optimal amount of education? How high
would you set this tax or subsidy per year of education?8.Planting a tree improves the environment: trees transform
greenhouse gases into oxygen, improve water retention in the
soil, and improve soil quality. Assume that the value of this en-
vironmental improvement to society is $10 for the expected
lifetime of the tree. The following table contains a hypothetical
demand schedule for trees to be planted.
Quantity of trees
Price of tree demanded (thousands)
$30 0
25 6
20 12
15 18
10 24
530
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