8

C h a p t e r

Key Concepts

PUBLIC
CHOICES AND
PUBLIC GOODS

and as either
Rival one persons consumption decreases the
quantity available for someone else, or
Nonrival one persons consumption does not
decrease the quantity available for someone else.
A private good is rival and excludable; a public good
is nonrival and nonexcludable. a common resource is
rival and nonexcludable; and, if a natural monopoly
can produce at zero marginal cost, the natural
monopoly is nonrival and excludable.
In addition, there also exist mixed goods. These are
private goods, the production of which is associated
with either an external benefit or an external cost. A
car is an example of a private good with an external
cost. This cost is the pollution emitted by the car
which has an adverse impact on parties other than the
producer and consumer of the car.

Public Choices
A public choice is a choice that has consequences for
more people than the decision maker. Sometimes a
public choice has consequences for a whole society.
For example, a decision made by a bureaucrat
employed in the Australian Tax Office, and approved
by the legislative process, can have consequences not
only for tax payers, but for the efficient allocation of
resources throughout the economy (see Chapter 6).
Public choice can also be defined by reference to
private choice. A private choice has consequences
only for the person making that choice.
Although we hope public choices made by
governments will yield results in line with the public
interest, the reality is that inefficient outcomes often
result. Economists explain this fact through the
theory of the political marketplace. In this market,
four self-interested groups - voters, firms, politicians
and bureaucrats - interact to bring about a political
equilibrium. This equilibrium is a position where the
choices of the four groups are compatible in that no
one group can see a way of improving its position by
making a different choice.
The core reason for the need for public choices is the
existence of public goods. Public goods are best
understood through the concepts of excludability and
rivalry. A good, service, or resource can be
classified as either
Excludable it is possible to prevent someone
from enjoying the goods benefit, or
Nonexcludable it is impossible (or extremely
costly) to prevent anyone from benefiting from
the good.

Providing Public Goods

A free-rider is a person who consumes a good or
service without paying for it. Because public goods
are nonexcludable, they create a free-rider problem,
that the market would provide an inefficiently small
quantity of a public good.
Just like the case for a private good, a persons
marginal benefit from a public good decreases as
more of the good is consumed. Because everyone
consumes the same units of a public good, the
marginal social benefit of a public good is the sum of
the marginal benefits of all individuals at each
quantity. The economys marginal social benefit
curve from a public good is given by the vertical sum
of each persons marginal benefit curve. (This
construction contrasts with the marginal social
benefit curve for a private good which is the
132

PUBLIC GOODS AND PUBLIC CHOICES

horizontal sum of each persons marginal benefit

curve.)
The efficient quantity of a public good is the amount
that sets the marginal social benefit of another unit
equal to the marginal social cost of supplying it.
With private provision, free riding limits the
amount produced and results in an inefficiently
low level of output.
Government provision can attain efficiency
because free riding is prevented by imposing
taxes to finance production of the good.
The amount of the good that is provided by the
government depends on the political marketplace and
the actions of politicians, bureaucrats, and voters.
Politicians often follow the principle of minimum
differentiation:
Principle of minimum differentiation the
tendency for competitors (political parties) to
make themselves similar in order to appeal to the
maximum number of clients or voters.
Bureaucrats try to maximise the budgets of their
agencies.
If voters are well informed, politicians wont
allow bureaucrats to expand expenditure beyond
the efficient level.
Voters might be rationally ignorant; that is, they
decide not to acquire information because the
(personal) cost of acquisition is larger than the
(personal) expected benefit from the information.
Providing Mixed Goods
Knowledge as well as research and development can
create external benefits.
Marginal private benefit (MB) the benefit from
an additional unit of a good or service that the
consumer of that good or service receives.
Marginal external benefit the benefit from an
additional unit of a good or service that people
other than the consumer enjoy.
Marginal social benefit (MSB) the marginal
benefit enjoyed by the entire society, both by the
consumer and by everyone else. In an equation,
MSB = MB + Marginal external benefit.
Figure 8.1 shows the marginal benefit curve, which
is the private demand curve and is labelled MB = D.
The marginal social benefit curve is labelled MSB.

133

The marginal external benefit is the vertical distance

between the two curves, equal at 400 units to the
length of the double headed arrow, $40 per unit. The
supply curve is the same as the marginal social cost
curve and is labelled S = MSC. The efficient quantity
is 400 units, where the MSC and MSB curves intersect.
The equilibrium quantity is 200 units, where the D
and S curves intersect. A deadweight loss is created
because less than the efficient quantity is produced.

The government has three methods it can use to

attain a more efficient outcome when external
benefits exist:
Public provision a public authority that
receives its revenue from the government can
produce the good or service. In Figure 8.1, the
government can produce the efficient quantity,
400. It then sets the price equal to $10 per unit to
insure that demanders buy 400 units.
Private subsidies a subsidy is a payment from
the government to the private producers of the
good or service. A subsidy increases the supply of
the good and thereby increases the quantity
produced.
Voucher A voucher is a token that the
government provides to households, which they
can use when they buy specified goods or

134

services. In Figure 8.1, a voucher equal to the

length of the double headed arrow, $40 per unit,
would shift the demand curve so that the
equilibrium quantity is the same as the efficient
amount, 400 units.
If voters are rationally ignorant, politicians,
influenced by bureaucrats and lobbyists representing
special interests, might allow inefficient
overprovision of the public good. If the government
is inefficiently providing too many public goods, a
voter backlash might occur when voters act to shrink
the size of the government.
Two theories of government action are:
Social interest theory predicts that
governments act to eliminate waste and achieve
economic efficiency.
Public choice theory predicts that government
can create inefficiency.
Based on these theories, government might grow
because of voter preferences (the social interest
theory) or because of inefficient overprovision (public
choice theory).

CHAPTER 8

curve for the entire economy, we sum the

individual marginal benefit curves horizontally.
For instance, at a price of $8 you demand 5 units
and I demand 5 units. Because the goods are rival
in consumption, none of the 5 units you consume
at this price can be the same as any of the 5 units
I consume. So, we sum the quantities and at $8,
in total we demand 10 units.
However, for the economys marginal social
benefit curve for a public good, we sum the
individual marginal benefit curves vertically. For
instance, for 5 units you are willing to pay $8 and
I am willing to pay $8. If 5 units are provided,
because the public good is nonrival, the 5 units
that you consume are precisely the same as the 5
units that I consume. So, we sum the prices and at
5 units, in total we are willing to pay $16.
The key difference that for a public good we
consume the same units but for a private good we
must consume different units is the reason that
the marginal social benefit curve for a public
good is derived differently from that for a private
good.

Questions
Helpful Hints
1. PUBLIC GOODS AND GOVERNMENT PROVIDED
GOODS : Not all goods provided by the
government are public goods. A public good is
defined by the characteristics of nonrivalry and
nonexcludability, not by whether it is publicly
provided. For example, some cities and
communities provide swimming pools; others
provide community services such as care for the
elderly. None of these are public goods even
though they are provided by the government.
Indeed, in many communities, the same services
are provided by the private sector.
2. THE MARGINAL SOCIAL BENEFIT FROM A
PUBLIC GOOD : The properties of nonrivalry and
nonexcludability associated with pure public
goods imply that the marginal social benefit curve
for the economy is different from that for private
goods.
A private good is rival in consumption.
Therefore, to obtain the marginal social benefit

True/False and Explain

Public Choices

1. Supposing the Australian federal government

adopts the recommendations of the Bradley
Review into higher education. This would be an
example of public choice.
2. In Australia, senior public servants work together
to achieve the social interest, as expressed by the
will of the people through their votes, and under
the direction of their respective political leaders.
3. A movie shown in an uncrowded movie theatre is
both nonexcludable and nonrival in consumption.
4. Any product supplied by government is a public
good.
5. A fish in the middle of the ocean is a common
resource.
6. Public goods but not private goods face the
free-rider problem.

PUBLIC GOODS AND PUBLIC CHOICES

7. A private, unregulated market produces less than

the efficient quantity of pure public goods.
8. The tragedy of the commons is that people use an
inefficiently small quantity of the common
resource.
Providing Public Goods

9. A persons marginal benefit from a public good

increases as more of the good is consumed.
10. The marginal social benefit curve for a public
good is obtained the same way as the marginal
social benefit curve for a private good.
Providing Mixed Goods

11. Rational ignorance is the situation wherein

politicians are uninformed about certain voters
desires.
12. The public choice theory predicts that the
government makes choices that achieve
efficiency.
13. Knowledge is an example of a product with
external benefits.
14. The private market produces more than the
efficient amount of a good having an external
benefit.
15. A subsidy can be the appropriate policy for a
good or service with an external benefit.
16. Taxing private producers of education can help
overcome the externality problem of education

135

12. The interaction of voters, firms, politicians and

bureaucrats in the political market place leads to
an equilibrium in which:
a. the social interest is achieved.
b. allocative efficiency is achieved.
c. an optimal allocation of resources is achieved.
d. no one group can see a way of improving its
position through a different choice.
13. A vaccination against the H1N1 virus (or swine
flu) is a mixed good because the external _______
of the vaccine are _________ and ___________ .
a. benefits; excludable; rival
b. benefits; non-excludable; non-rival
c. costs; excludable; rival
d. costs; non-excludable; non-rival
14. Of the following, which is the best example of
public good?
a. The defence services provided by the
Australian armed forces
b. A pair of jeans
c. A cable television system
d. An uncrowded theme park such as Movie
World on the Gold Coast.
15. To two fishermen, a tuna fish swimming in the
middle of the ocean is a good that is
a. nonrival and nonexcludable.
b. nonrival and excludable.
c. rival and nonexcludable.
d. rival and excludable

Multiple Choice
Public Choices

11. All of the following are reasons for the existence

of government EXCEPT:
a. to establish and maintain property rights.
b. to provide non-market mechanisms for the
allocation of scarce resources in cases of
market failure.
c. to provide a means for the redistribution of
income and wealth if the market outcome is not
socially acceptable.
d. all of the above are reasons for the existence of
government.

16. To two farmers, a cow (owned by one of the

farmers) grazing in the middle of that farmers
paddock is
a. nonrival and nonexcludable.
b. nonrival and excludable.
c. rival and nonexcludable.
d. rival and excludable
7. Which of the following is rival and
nonexcludable?
a. A public good
b. A common resource
c. A private good
d. A natural monopoly

136

8. The efficient amount of a public good

a.is as much as the public demands.
b. cannot be provided unless the tragedy of
nonexcludability is overcome.
c. is the amount that has the marginal social
benefit exceeding the marginal social cost by
as much as possible.
d. is such that the marginal social benefit equals
the marginal social cost.
19. A free-rider is someone who
a. does not pay taxes.
b. cannot be excluded from consuming a public
good even though he or she did not pay for the
good.
c. paid more than his or her fair share for the
provision of a public good.
d. cannot be forced to pay for his or her
consumption of a private good.
10. The economys marginal social benefit curve for a
public good is obtained by summing the individual
a. marginal cost curves horizontally.
b. marginal cost curves vertically.
c. marginal benefit curves horizontally.
d.
marginal benefit curves vertically.
11. Suppose that the marginal social benefit from
another unit of a public good exceeds the marginal
social cost of producing it. Then
a. the public good is the same as a private good
and provision is at the efficient level.
b. the public good is not the same as a private
good but provision is at the efficient level.
c. less of the product should be produced because
its provision exceeds the efficient level.
d. more of the product should be produced
because its provision is less than the efficient
level.

CHAPTER 8

12. Governments often provide public-goods such as

national-defence because
a. governments know how to produce these
goods.
b. of the free-rider problems that result in
underproduction by private markets.
c. people do not value national defence very
highly.
d. of the potential that private firms will make
excess profits.
13. The idea that political parties will have similar
policy proposals reflects
a. free riding.
b. rational ignorance.
c. government failure.
d. the principle of minimum differentiation.
Providing Public Goods

14. Amy realises that her personal benefit from

becoming an expert on welfare reform is limited,
so she does not learn about this issue. Amys
decision best reflects
a. free riding.
b. the nonexcludability principle.
c. the principle of minimum differentiation.
d. rational ignorance.
15. The amount of a public good that maximises the
net benefit to the economy is likely to be provided
if
a. voters are well informed.
b. rational ignorance is combined with special
interest lobbying.
c. politicians are well informed.
d bureaucrats are rationally ignorant.

PUBLIC GOODS AND PUBLIC CHOICES

137

16. Public choice theory predicts that

a. the government conducts policies that move
the economy toward an efficient use of
resources.
b. politicians and bureaucrats tend to be more
concerned about the social interest than
individuals in the private sector.
c. the choices of government maximise net
benefits.
d. the choices of government can create
inefficiency.
Providing Mixed Goods

Use Table 8.1 for the next four questions.

TABLE 8.1

Multiple Choice Questions 17, 18, 19, 20

Quantity

Marginal
private
cost
(dollars)

Marginal
private
benefit (dollars)

Marginal
social
benefit
(dollars)

500

$5

$9

$11

550

10

600

650

700

17. Table 8.1 represents the market for a good with

a. only an external cost.
b. only an external benefit.
c. both external costs and benefits.
d. no externalities.
18. Left unregulated, the equilibrium quantity is
a. 550.
b. 600.
c. 650.
d. 700.
19. The efficient level of output is
a. 550.
b. 600.
c. 650.
d. 700.

20. What can the government do so that the efficient

level of output is produced?
a. Subsidise suppliers $8 per unit.
b. Subsidise suppliers $2 per unit.
c. Tax suppliers $2 per unit.
d. Tax suppliers $8 per unit.
21. Which of the following is NOT an appropriate
solution for the Australian government in the
provision of an efficient quantity of education?
a. abolish the higher education sector, as
Australia does not have a comparative
advantage in education, and students should
obtain their degrees overseas.
b. public provision
c. private subsidies
d. vouchers

Short Answer Problems

1. Explain the nonrivalry and nonexcludability
features of a pure public good. Why are both
necessary for the good to be a pure public good?
2. What is the free-rider problem? For what type of
goods is the free-rider problem particularly
acute? Why does free riding hinder private firms
from producing the efficient amount (or any
amount!) of a public good?

TABLE 8.2

Security at Parkin Springs Retirement Village

Number of
guards

Total cost
of guards
(dollars )

Marginal
benefit per
resident
(dollars)

Marginal
social benefit
to all residents
(dollars)

$300

$10

$____

600

____

900

____

1,200

____

3. Parkin Springs Retirement Village has 100

residents who all are concerned about security.
Table 8.2 gives the total cost per day of hiring a
24-hour security guard service and the marginal
benefit per day to each of the residents.

138

a. Why is a security guard a public good for the

residents of Parkin Springs Retirement
Village?
b. Why will no guards be hired if each of the
residents must act individually?
c. Complete the last column of Table 8.2 by
computing the marginal social benefit of
security guards to all the residents combined.
d. Suppose the residents decide they will engage
a security service. What is the efficient
number of guards to employ?
4. Explain why voter ignorance might be rational.
5. In Australia, the federal government claims to
provide higher education at a price less than cost.
What economic argument supports the policy of
charging students at public universities less than
the full cost of their education?

CHAPTER 8

and the third column gives the marginal private

cost. Because education generates external
benefits, the marginal social benefit shown in the
last column is greater than marginal private
benefit. Education creates no external costs.
a. What equilibrium price and quantity would
result if the market for education is
unregulated?
TABLE 8.3

Education in Transylvania
Marginal
Marginal
Quantity
private
private
(number
of
benefit (dollars)
cost
students)
(dollars)

Marginal
social
benefit
(dollars)

$500

$200

$800

400

250

700

300

300

600

200

350

500

100

400

400

450

300

b. What is the efficient quantity of students in

Transylvania?
c. In an attempt to address the inefficient level
of education in his nation, Igor the newly
appointed minister of education has
decided to provide a low-cost public
university, Igor Omphesus (Igors middle
name is Omphesus) University. To attain the
efficient level of schooling, what must tuition
be at the new university, I.O.U.?
d. What is the marginal cost of schooling the last
student at this university?
Youre the Teacher
6. Vaccination creates an external benefit and has
no external costs. Use Figure 8.2 to illustrate the
market for the swine flu vaccination. In the
figure, arrange your curves so that 50 thousand
doses will be taken in the absence of any
government intervention and 75 thousand doses
is the efficient number of doses. How can the
government move this market toward efficiency?
7. The first two columns of Table 8.3 give the
demand schedule for education in Transylvania,

1. I dont see why the government would ever do

anything that leads to inefficiency. Inefficiency
hurts the nation and I thought that the
government would try to help us. Comment on
this students views and give an example of how
the government might take actions that create
inefficiency.

PUBLIC GOODS AND PUBLIC CHOICES

Answers
True/False Answers
Pubic Choices

11. T This would be a choice made by political

leaders with potential consequences for many
people, including, perhaps, the allocation of
resources away from training skilled trades
people, to university education.
12. F While this is the ideal outcome, senior public
servants are also bureaucrats whose self
interest is served through the maximisation of
their own career prospects, and their own
departmental budgets.
13. F The movie is nonrival but not nonexcludable
because a theatre can easily exclude people
who do not pay to see the movie.
14. F Public goods are characterised by nonrivalry
and nonexcludability not by government
supply.
15. T The fish is rival, because if one person catches
it another cannot, and nonexcludable, because
the people cannot prevent the other from
trying to catch it.
16. T Public goods are nonexcludable and so they
face a severe free-rider problem.
17. T A private unregulated market will produce less
than the efficient quantity of a public good due
to the free-rider problem.
18. F The tragedy of the commons is that people use
an inefficiently large quantity of the common
resource.
Providing Public Goods

19. F Like the marginal benefit from a private good,

the marginal benefit from a public good
decreases as more of the good is consumed.
10. F The marginal social benefit curve for a public
good is derived by adding vertically each
individuals marginal benefit curve; the
marginal social benefit curve for a private good
is derived by adding horizontally each persons
marginal benefit curve.

139

Providing Mixed Goods

11. F Rational ignorance occurs when a voter is

uninformed about an issue because the benefit
to the voter of becoming informed is less than
the cost to the voter.
12. F The social interest theory predicts that the
government makes choices to achieve
efficiency; the public choice theory says that
government choices can result in inefficiency.
13. T Knowledge has benefits that spill over to
others, so knowledge has external benefits.
14. F The private market produces less than the
efficient amount of a good with an external
benefit.
15. T Left alone, the private market would produce
less than the efficient amount of the good. A
subsidy will increase the amount produced.
16. F Education has an external benefit, so the more
appropriate policy is to subsidise, not tax,
education.

Multiple Choice Answers

Public Choices

11. d The question covers the three reasons for the

existence of government in a market economy.
12. d Each of the four groups seeks to maximise
their own interests, so that while political
equilibrium may be compatible with the social
interest and allocative efficiency, it is more
likely that this will not be the case.
13. b The external benefit associated with one
individual receiving the vaccine is that the risk
for others of contracting the virus is also
decreased. This benefit is both nonexcludable and non-rival.
14. a The defence services are nonrival and
nonexcludable and so are a public good.
15. c If one tuna fisherman catches the fish, the
other cannot, so the tuna fish is rival; but in
the middle of the ocean no fisherman can
exclude another from trying to catch the fish,
so the tuna fish is nonexcludable.
16. d The farmer who owns the cow can use it but
the other farmer cannot, so the cow is rival; in
the middle of a paddock, the first farmer can

140

17. b
18. d

19. b
10. d

11. d

12. b

13. d

14. d

15. a

16. d

exclude the other farmer from trying to catch

the cow. Note the fundamental difference
between the cow which is owned and therefore
is both rival and excludable, and the fish,
which is not owned and therefore is rival but
nonexcludable.
A common resource, such as fish in the ocean,
is rival and nonexcludable.
If the marginal social benefit from any good
equals the marginal social cost, the efficient
amount is produced.
This answer is the definition of a free-rider.
Vertical summation shows the price everyone
in total is willing to pay for any particular
quantity.
If one more unit is produced, the gain to
society (the marginal social benefit) exceeds
the cost to society (the marginal social cost),
so society is better off if the unit is produced.
The free-rider problem means it is not
profitable for private firms to produce public
goods. Therefore, they are often produced by
governments.
In a two party political system, both parties
want to appeal to a majority of voters in order
to be elected. So to appeal to voters, both
present similar proposals, which is the
principle of minimum differentiation.
Amy is pursuing her own self-interest and
rationally decides not to become an expert on
welfare reform.
If voters are well informed, they can ensure
that politicians force bureaucrats to provide
the efficient amount of the public good.
Public choice theory says that rational
ignorance might lead to inefficient outcomes.

Providing Mixed Goods

17. b At any level of output, the marginal social

benefit exceeds the marginal private benefit,
which indicates that there must be an external
benefit.
18. b The private market produces the level of
output that equalises the marginal private cost
(the private supply curve) and the marginal
private benefit (the private demand curve).

CHAPTER 8

19. c Efficiency requires that the amount of the

good produced equalise the marginal social
cost and the marginal social benefit. In this
case, efficiency requires that output be 650.
20. b If suppliers are granted a $2 per unit subsidy,
the marginal private cost schedule drops by $2
at every unit of output. Hence to produce 650
units of output, the new marginal private cost
becomes $6. This equals the marginal private
benefit of 650 units, so the (new) equilibrium
price is $6 and the quantity produced is the
efficient amount, or 650 units.
21. a Abolishing the higher education sector would
have numerous adverse effects on the
Australian economy, beginning with an
increase in the brain drain of qualified
people from Australia to other destinations.

Answers to Short Answer Problems

1. A good has the nonrivalry feature if its
consumption by one person does not reduce the
amount available for others. The nonexcludability
feature means that if the good is produced and
consumed by one person, others cannot be
excluded from consuming it.
Both characteristics are necessary for the good to
be a pure public good. The nonrivalry feature of a
public good means that everyone can consume the
good simultaneously. Limiting the consumption to
one person at a time would be inefficient because
others can consume the product without denying
it to anyone else. In addition, private goods are
sold by firms so that the firms owners can earn
an income and thereby purchase goods and
services for themselves. Public goods are
nonexcludable, which means that anyone can
consume the product regardless of the amount
paid. This fact gives people the incentive to free
ride. Free riding makes the provision of such
goods by private companies unlikely because the
firm will not be able to collect any revenue from
selling the product.
2. The free-rider problem is that people will try to
avoid paying for a public good. In unregulated
markets the free-rider problem results in the
production of too little of a public good because
there is little incentive for individuals to pay for

PUBLIC GOODS AND PUBLIC CHOICES

141

it. The free-rider will not pay because that

payment will likely have no perceptible effect on
the amount the person will be able to consume.
Hence avoiding payment is rational. This
incentive creates a problem for the private sector
when it attempts to provide the product. In
particular, suppliers firms produce goods in
exchange for payments because the suppliers
want to use their income to buy goods and
services for themselves. If people do not pay for
the goods, suppliers receive no income and hence
have no incentive to produce the goods.
3. a. A security guard is a public good in this case,
because the guard has the features of
nonrivalry and nonexcludability. Employment
of the guard involves nonrivalry because one
residents consumption of the security
provided does not reduce anyone elses
security. Nonexcludability is involved
because, once a security guard is in place, all
residents enjoy the increased security and none
can be excluded.
b. If each resident must act individually to hire a
security guard none will be hired because each
resident receives only $10 in benefit from the
first guard, who costs $300 per day.
TABLE 8.4

Short Answer Problem 3

Number of
guards

Total cost
of guards
(dollars )

Marginal
benefit per
resident
(dollars)

Marginal
social benefit to
all residents
(dollars)

$300

$10

$1,000

600

400

900

300

1200

200

c. The entries in the last column of Table 8.4

show the marginal social benefit. These
answers are obtained by multiplying the
marginal benefit per resident by the number of
residents, 100. This multiplication is the
numerical equivalent of summing the
individual marginal private benefit curves
vertically for each quantity of guards.
d. If the apartment council hires the number of
guards that sets the marginal social benefit

equal to the marginal social cost, it will hire

the efficient number of guards. The marginal
social benefit of the third guard, $300, equals
the marginal social cost, $300, so the efficient
number of guards is 3.
4. Most issues have only a small and indirect effect
on most voters. So for a voter to spend much time
and effort to become well informed about such
issues would be irrational because the additional
cost incurred by the voter would exceed any
additional benefit enjoyed by the voter. Only if
the voter is significantly and directly affected by
an issue does becoming well informed pay. As a
result, most voters will be rationally ignorant
about any specific issue.
5. The economic argument is that education
generates external benefits. In particular, when
individuals are educated, society at large receives
benefits beyond the private benefits that accrue to
those choosing how much education to obtain.
The presence of the external benefit means that in
the absence of government intervention, the
private sector would provide too little education.
To attain efficiency in the market for education,
the government provides below-cost education at
Australias public universities. Thoughtful
economics students might look at the number of
students in their various lectures, and the conditions
of the lecture theatres in which they are held, (not
to mention the overworked lecturers) and have
serious doubts about the efficiency of government
provision.

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6. Figure 8.3 shows the market for swine flu

vaccine. Because there are no external costs, the
marginal social cost curve equals the marginal
private cost curve, which is the same as the
supply curve. This curve is labelled S = MC =
MSC in the figure. It also is the private supply
curve. However, the presence of the external
benefit means that the marginal social benefit
(MSB) curve lies right of the marginal private
benefit curve, which is the same as the private
demand curve (labelled MB = D). The vertical
distance between the curves equals the marginal
externality; that is, it is the additional (external)
benefit to society over and above the benefit to
the consumer. In the absence of government
intervention, 50 thousand doses of vaccine are
produced but the efficient amount is 75 thousand
doses. To move this market closer to the efficient
level of output, the government might subsidise
production. This policy could take the form of
paying producers to produce more vaccine. The
aim is to shift the private supply curve rightward
so that it intersects the private demand at 75
thousand doses, the efficient amount, and price
$10 per dose. Alternatively, the government
might buy 75 thousand doses and then resell them
to consumers below cost at $10 per dose, the price
necessary to induce consumers to buy 75 million
doses.

CHAPTER 8

7. a. In an unregulated market, the equilibrium

price and quantity are determined by the
intersection of the marginal private benefit and
marginal private cost curves because these are
the markets demand and supply curves,
respectively. Thus the equilibrium price is
$300, and the equilibrium quantity is 3
students.
b. The efficient quantity is determined by the
intersection of the marginal social cost and
marginal social benefit curves. Because there
are no external costs, the marginal private cost
equals the marginal social cost. As a result,
efficiency is attained at a quantity of 5
students attending college.
c. Igor wants 5 students to attend his new
university, I.O.U. Five students will attend
only when the tuition is $100.
d. When 5 students attend the university, the
marginal cost of the 5th student is $400. By
charging the student only $100 in tuition, Igor
apparently is losing money on this student.
However, the loss is only apparent: Five
students are the efficient level of education
because the total marginal social benefit from
the 5th student is $400, which equals the
marginal cost of educating this student.

Youre the Teacher

1. The idea that the government wont create
inefficiency is called the social interest theory of
government. Its based on the assumption that
government actions lead to efficiency. However,
public choice theories of government suggest
that at times government actions can result in
inefficiency, that is, can cause government failure.
Public choice theories assert that well-informed
special interest groups are able to induce the
government to undertake programs that do not
maximise net benefits because most voters are
rationally ignorant. For most voters, being well
informed about any particular issue does not pay.
As a result, a small, well-informed interest group
has an influence on government programs that
greatly exceeds its size relative to all voters.
Suppose there are three large producers of
copper in Australia. If they can convince the

PUBLIC GOODS AND PUBLIC CHOICES

government to tax foreign copper $1 per ton, each

U.S. copper producer may benefit by $80 million
dollars. Meanwhile, this tax might cost each
consumer in Australia 80. It seems clear to me
that the copper producers are going to lobby like
crazy for this policy and contribute a lot of dough

143

to candidates campaigns. But you and I arent

going to care much. It sure isnt in our personal
interest to study this issue because we can gain, at
most 80! So well stay rationally ignorant, but
the copper producers will lobby hard, so this
policy might be enacted.

PUBLIC GOODS AND PUBLIC CHOICES

Chapter Quiz
11. Which of the following goods is nonexcludable?
a. a lighthouse
b. pay-per-view television
c. a restaurant meal
d. a college education
12. If a good has an external benefit, a market left
unregulated will produce
a. more than the efficient amount.
b. the efficient amount.
c. less than the efficient amount.
d. an amount that may be more than, less than, or
equal to the efficient amount depending on
how large the external benefit is relative to the
private benefit.
13. A public good is necessarily
a. nonrival and nonexcludable.
b. nonrival and excludable.
b. rival and nonexcludable.
d. rival and excludable.
14. Of the goods and activities listed below, the best
example of a public good is
a. a tuna in the ocean.
b. national defence.
c. building a large apartment for low-income
families.
d. producing paper for use in newspapers.
15. The private marginal benefit from a good is less
than the social marginal benefit but the private
marginal cost of the good equals the social
marginal cost. As a result, the good ____ external
benefits and ____ external costs.
a. has; has
b. has; has no
c. has no; has
d. has no; has no

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16. What characteristic of a public good makes free

riding possible?
a. The nonrival characteristic.
b. The rival characteristic.
c. The nonexcludable characteristic.
d. The excludable characteristic.
17. When a student makes a decision about how much
schooling to acquire, the student considers only
the
a. private marginal benefits and private marginal
costs.
b. social marginal benefits and social marginal
costs.
c. marginal external benefits and marginal
external costs.
d. private marginal benefits and social marginal
costs.
18. Who might opt to be rationally ignorant?
a. Special interest groups.
b. Voters.
c. Politicians.
d. Bureaucrats.
19. The marginal social benefit curve of a public good
is calculated by _____ summing individual
marginal ____ curves.
a. vertically; cost
b. vertically; private benefit
c. horizontally; social benefit
d. horizontally; private benefit
10. To offset the externality from knowledge,
governments use all of the following EXCEPT
a. patents.
b. copyrights.
c. below-cost provision.
d. taxes.

The answers for this Chapter Quiz are on pages 316-317.