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Chapter 5: Q. 5.4 (page 100)
Analyze how public spending programs such as Medicare and spending on public education affect consumption incentives.
They improve consumption incentives.
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Suppose that repeated application of a pesticide used on orange trees causes harmful contamination of groundwater. The pesticide is applied annually in almost all of the orange groves throughout the world. Most orange growers regard the pesticide as a key input in their production of oranges.
(a) Use a diagram of the market for the pesticide to illustrate the implications of a failure of orange producers鈥� costs to reflect the social costs of groundwater contamination.
(b) Use your diagram from part (a) to explain a government policy that might be effective in achieving the amount of orange production that fully reflects
all social costs.
Draw a diagram of this nation鈥檚 market for automobiles, which are a substitute for buses. Explain how the government policy you discussed in part (b) of Problem 5-5 is likely to affect the market price and equilibrium quantity in the country鈥檚 auto market. How are auto consumers affected by this policy to attain the spillover benefits of bus transit?
After a government implements a voucher program, granting funds that families can spend at schools of their choice, numerous students in public schools switch to private schools. Parents鈥� and students鈥� valuations of the services provided at both private and public schools adjust to equality with
the true market price of educational services. Is anyone likely to lose out nonetheless? If so, who?
Consider a nation with a government that does not provide people with property rights for a number of items and that fails to enforce the property rights it does not assign for the remaining items. Would externality be more or less in this nation than in a country such as the United States? Explain.
Based on your answer to Question 5-19, if the government aims to correct the positive externality in the inoculation market via a per-unit subsidy to consumers, in the wake of the study, is the appropriate per-unit subsidy higher or lower than before?
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