Exam 27: Public Goods

Suppose some people like national defense and others are offended by it -- i.e.some people derive positive marginal benefit and others derive negative marginal benefit.Efficiency then demands that national defense is produced until the sum of the positive marginal benefits is equal to the (absolute value)of the negative marginal benefits.

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Question 1

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We say that individuals get a "warm glow" from giving to a public good if they not only get utility from the public good but also from giving itself.Explain the following: "While warm glow lessens the free rider problem,it cannot eliminate it."

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Question 2

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The private benefits one gets from giving keep us giving even when the number of individuals increases and the free rider problem gets large.However,the free rider problem is still there -- to the extent to which we value the public good,we give too little relative to the efficient level.Only if the only utility we get is from the warm glow does the free rider problem disappear -- but that's because the public goods problem has then disappeared.

Suppose a social entrepreneur needs to raise money for a public good.He has to allocate his fund raising package to activities that persuade people of the importance of the public good and to activities that make people feel good about giving.As the population gets large,which of these do you think he will increasingly emphasize?

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Question 3

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As the population gets large,the free rider problem becomes larger -- which means that just convincing someone that the public good is important won't raise much money.But making someone feel good about giving is all about generating private benefits from giving -- and that is unaffected by how many individuals there are.Thus,one would expect the fund raising to increasingly focus on making people feel good about giving rather than persuading them of the importance of the public good.

Public goods arise because of externalities.

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Question 4

The optimal subsidy for private giving to a public good increases as the number of people benefiting from the public good increases.

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Question 5

In our study of monopoly,we found that monopolists can increase profit by segmenting the market and price discriminating (under third degree price discrimination).Now suppose a firm is producing an excludable local public good.Can you justify a form of such market segmentation and price discrimination as efficient?

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Question 6

Our free-rider model of voluntary giving suggests that,when the government subsidizes private giving to charity,it's contribution will simply "crowd out" the private contributions so long as no one is at a corner solution.

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Question 7

Tiebout local public good provision is more easily implemented than a Lindahl equilibrium -- because people know each other's tastes locally and can more easily come up with the right way to divide the cost for public goods.

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Question 8

In a game where individuals are asked to contribute to a public good,best response functions slope down because each individual believes the other will not give very much.

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Question 9

Suppose you run a charity that raises money for a worthy public good.Your donors may be concerned about how much of each dollar that is raised is put back into more fund-raising. a.Suppose the marginal product of a dollar put into fundraising is initially increasing but eventually diminishing.How much will the last dollar spend on fundraising raise? b.If everyone considers their own contribution to this charity as the marginal contribution,what will be their impression of how much they are really helping the public good? c.Would you expect your answer to (b)to make it harder for you to raise money for your charity? d.How might your answer to (c)explain why some charities make a point of informing people that they have placed a cap on their fund raising budget -- or that they have placed a cap on how many people will be approached during the fund raising campaign?

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Question 10

Consider a game where individuals are asked to contribute to a public good.Then consider the best response function for individual i,with individual i's contribution measured on the vertical axis and "the average contribution by everyone else" on the horizontal.Then as the number of individuals increases,i's best response function shifts in.

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Question 11

If everyone has identical preferences over public goods,Lindahl prices for providing the efficient level of the public good will be the same for everyone.

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Question 12

When the government contributes to a public good,private contributions will fall.

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Question 13

If giving to public goods is subsidized through deductions under a progressive income tax,the government subsidizes public goods consumed by higher income individuals at greater rates than public goods consumed by lower income individuals.

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Question 14

What problem are mechanism designers attempting to overcome when they "design mechanisms" to provide public goods?

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Question 15

If private giving to public goods involves externalities,what is a Pigouvian solution to the public goods problem?

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Question 16

Any efficient allocation of public goods will be such that the sum of the marginal benefits is equal to the marginal cost -- but the level of the public good may differ depending on how income is distributed in the population.

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Question 17

If a public good is financed through Lindahl prices,those whose total willingness to pay for the public good is high will end up paying a higher Lindahl price than those whose total willingness to pay for the public good is low.

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Question 18

If the formation of Lindahl prices to support an efficient level of public goods is derived from individuals' reporting their marginal willingness to pay,people will under-report their true willingness to pay.

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Question 19

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Exam 27: Public Goods

We say that individuals get a "warm glow" from giving to a public good if they not only get utility from the public good but also from giving itself.Explain the following: "While warm glow lessens the free rider problem,it cannot eliminate it."

Public goods arise because of externalities.

The optimal subsidy for private giving to a public good increases as the number of people benefiting from the public good increases.

Our free-rider model of voluntary giving suggests that,when the government subsidizes private giving to charity,it's contribution will simply "crowd out" the private contributions so long as no one is at a corner solution.

Tiebout local public good provision is more easily implemented than a Lindahl equilibrium -- because people know each other's tastes locally and can more easily come up with the right way to divide the cost for public goods.

In a game where individuals are asked to contribute to a public good,best response functions slope down because each individual believes the other will not give very much.

If everyone has identical preferences over public goods,Lindahl prices for providing the efficient level of the public good will be the same for everyone.

When the government contributes to a public good,private contributions will fall.

If giving to public goods is subsidized through deductions under a progressive income tax,the government subsidizes public goods consumed by higher income individuals at greater rates than public goods consumed by lower income individuals.

What problem are mechanism designers attempting to overcome when they "design mechanisms" to provide public goods?

If private giving to public goods involves externalities,what is a Pigouvian solution to the public goods problem?

Any efficient allocation of public goods will be such that the sum of the marginal benefits is equal to the marginal cost -- but the level of the public good may differ depending on how income is distributed in the population.

If a public good is financed through Lindahl prices,those whose total willingness to pay for the public good is high will end up paying a higher Lindahl price than those whose total willingness to pay for the public good is low.

If the formation of Lindahl prices to support an efficient level of public goods is derived from individuals' reporting their marginal willingness to pay,people will under-report their true willingness to pay.

Introduction

A Consumers Economic Circumstances

Economic Circumstances in Labor and Financial Markets

Tastes and Indifference Curves

Different Types of Tastes

Doing the Best We Can

Income and Substitution Effects in Consumer Goods Markets

Wealth and Substitution Effects in Labor and Capital Markets

Demand for Goods and Supply of Labor and Capital

Consumer Surplus and Deadweight Loss

One Input and One Output: a Short-Run Producer Model

Production With Multiple Inputs

Production Decisions in the Short and Long Run

Competitive Market Equilibrium

The Invisible Hand and the First Welfare Theorem

General Equilibrium

Choice and Markets in the Presence of Risk

Elasticities, Price-Distorting Policies, and Non-Price Rationing

Distortionary Taxes and Subsidies

Prices and Distortions Across Markets

Externalities in Competitive Markets

Asymmetric Information in Competitive Markets

Monopoly

Strategic Thinking and Game Theory

Oligopoly

Product Differentiation and Innovation in Markets

Governments and Politics

What Is Good Challenges From Psychology and Philosophy

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