QUESTIONS FOR DISCUSSION
The questions deal with several aspects of the micro failure approach of this chapter. You will find students are likely to have something to say about these if you have time to briefly discuss them in class or if you wish to use them as homework assignments. This would be a good way to wrap up the micro section of the course.
1. Why should taxpayers subsidize public colleges and universities? What benefits do they receive from someone else's education?
The market provides a sub-optimal amount of goods or services with positive externalities. Taxpayer subsidization is one way to increase the amount closer to the optimal level. All citizens in a state or in a country benefit from the positive externalities of education. Better education breeds better citizenship and strengthens democracy. We are able to maintain a higher standard of living because those who benefit directly from the public colleges and universities become the engineers, inventors, and entrepreneurs who make our economy grow. These social benefits justify subsidies to education.
2. If everyone seeks a “free ride,” what mix of output will be produced in Figure 9.2? Why would anyone voluntarily contribute to the purchase of public goods like flood control?
Should everyone seek a “free ride”, then no public goods will be produced and the output mix will consist entirely of private goods. People might voluntarily contribute to flood control if their house is in a flood plain, i.e., there is some private benefit associated with the public good. Also, there might exist a sense of community to “help out” their neighbor.
3. Could local fire departments be privately operated, with services sold directly to customers? What problems would be involved in such a system?
Yes. Many rural fire departments charge an annual fee. Should a house for which no annual fee has been paid catch fire, it is allowed to burn. Neighboring houses that have paid for fire protection are protected from the fire spreading. There is, of course, the problem that not enough homeowners will pay the annual fee to pay for the total cost of the fire department.
4. Identify specific government activities that are justified by different micro failures.
Exhaust Emission Regulations for Automobiles - Externalities
Antitrust Division of the Department of Justice - Market Power
Aid for Families with Children - Equity
National Defense - Public Goods
5. Why would auto manufacturers resist exhaust-control devices? How would their costs, sales, and profits be affected?
They resist these devices because they represent increased costs of production, which, ceteris paribus, will increase car prices and reduce sales and profits.
6. Does anyone have an incentive to maintain auto exhaust-control devices in good working order? How can we ensure they will be maintained?
Yes, the automobile owner has an incentive if the failure of the device results in the need for more frequent repairs to the automobile. Otherwise, there may not be market incentives. The best way to ensure they will be maintained is to link their functioning to the efficient functioning of the engine. Maintaining them would prevent more expensive engine repairs. In addition, some states have linked registration of vehicles to inspection of auto-exhaust-control devices. By requiring that the devices work properly before a car can be registered or re-registered, we can be sure that they will be maintained periodically.
7. Suppose we established a $10,000 fine for water pollution. Would some companies still find that polluting was economical? Under what conditions?
Yes. If the cost of preventing the water pollution were greater than $10,000, the companies would be making a "rational" economic choice if they polluted and paid the fine.
8. What are the costs of New York City’s recycling program (see Headline, p. 215)?
There are costs to collect, sort, clean, and process the recycled items. There is also air pollution, emissions, traffic, and wear on streets from the second set of trucks. In order to decide if the costs can be justified, they must be compared to the benefits of recycling. Like all economic activities, recycling should be done up to the point were the marginal cost equals the marginal benefit.
9. Four companies produce nearly all breakfast cereals. How might this concentration of market power affect market outcomes? What should the government do, if anything?
Microeconomics tells us that this concentration of market power is likely to have made cereal prices higher and production less efficient than they would otherwise be, barring any economies of scale. Government could deter collusive pricing and encourage more competition in the market.
10. The government now spends close to $500 billion a year on Social Security benefits. Why don't we leave it to individuals to save for their own retirement?
The Social Security System was part of FDR’s New Deal after most Americans lost their life savings during the Great Depression. We are not willing to have individuals rely entirely on their own marginal utilities concerning future versus present income because of two important factors: (1) society holds some obligation to protect the interests of all citizens, and (2) by requiring people to pay taxes to support the Social Security System, we prevent those who would not otherwise save for their old age from becoming public burdens. Equity is the basic issue with which we are concerned in the Social Security system.