Exam 19: Government in the Market Economy

Demand Estimation for Public Goods. The nonrival consumption concept gives rise to fundamental differences between demand estimation for public goods and demand estimation for private goods. A. Explain the graphical difference between aggregating individual demand for public goods versus private goods. B. Can the aggregate value of a given public good ever be less than the maximum value placed upon it by a single individual?

Social Rate of Discount. Assume that the rate of return on long-term government bonds is 10%, a typical after-tax return on investment in the private sector is 12%, the marginal corporate and individual tax rate is 40%, and consumption averages 95% of total income. A. Based on the information provided, calculate an economically appropriate social rate of discount. B. Is a decrease in the marginal corporate tax rate likely to increase, decrease, or have no effect on the appropriate social rate of discount?

The notion that individuals know what is in their own best interest is:

Hidden Preferences Problem. Public goods that incorporate both the nonrival consumption and nonexclusive attributes involve a number of difficulties in demand estimation.

Economics of Health Care. Technological progress in the form of new medical knowledge, medicines, treatments, and medical devices has allowed Americans and people worldwide to live longer, healthier lives. As new treatment options become available, it is not surprising that the United States and other major industrialized countries continue to shift more resources to health care. Research suggests that between 50 and 75 percent of the growth rate in health expenditures in the United States is attributable to technological progress in health care goods and services. However, the increase in resources devoted to health care has led to concern about its affordability, both for families and for the Nation as a whole. The United States expends a higher fraction of GDP on health care than does any other industrialized country. According to an international comparison released in 2003, the United States spent 13.9 percent of GDP on health care in 2001, while the average among industrialized countries was 8.4 percent of GDP. Measures of health outcomes such as longevity and infant mortality, however, are not markedly different in the United States than in other advanced economies that spend substantially less on health care. A. Use a normal good (demand-side) argument to explain why the U. S. consumer, among the richest in the world, spends a higher percentage of income on health care than do consumers in most poorer countries. B. Use a supply-side argument to explain why the costs of providing health care services appear higher for Americans than for other world-wide beneficiaries of health care innovation.

Social Rate of Discount. Assume that the rate of return on long-term government bonds is 9%, a typical after-tax return on investment in the private sector is 10%, the marginal corporate and individual tax rate is 50%, and consumption averages 95% of total income. A. Based on the information provided, calculate an economically appropriate social rate of discount. B. Would a reduction in the Federal deficit that led to a decline in the long-term government bond rate affect the appropriate social rate of discount? If so, how? If not, why not?

Public vs Private Goods. Use the nonrival concept to classify each of the following goods and services as public goods or private goods. Also indicate whether or not the good or service in question can be characterized by the nonexclusion concept. Explain. A. Police protection. B. Public libraries C. State and local lotteries. D. Long-distance phone service. E. Yellowstone National Park.

Nonrival Consumption Concept. The essential distinguishing characteristic of public goods is the concept of nonrival consumption. A. Explain the nonrival consumption concept. B. Cite some examples of goods that display the nonrival consumption attribute.

One of the characteristics of a public good is that the:

Nonexclusion Concept. Many public goods display the attribute of being nonexclusionary in consumption. A. Explain the nonexclusion concept. B. Do educational TV broadcasts display both the nonrival and nonexclusion attributes? C. With the emergence and popularity of cable TV, is an optimal amount of educational TV likely to be provided by the private sector?