Microeconomics Chapter 16

What are the two criteria used to classify goods?

A:

1. Excludability – Can someone be prevented from using it?

2. Rivalry in consumption – Does one person’s use reduce availability for others?

Define private good.

• Rival and excludable

• Example: A sandwich, a car

• One person’s use reduces availability, and others can be excluded if they don’t pay

Define a public good.

A:

• Non-rival and non-excludable

• Example: National defense, weather forecasting

• Everyone can use it simultaneously, and no one can be prevented from accessing it

Define and give two examples of a common resource.

A:

• Rival but non-excludable

• Example: Fish in the ocean, atmosphere

• No one can be stopped from using it, but use by one reduces availability for other

Define a club good.

A:

• Non-rival but excludable

• Example: Netflix, cable TV

• You can be excluded unless you pay, but one more user doesn’t reduce others' benefit

What’s the difference between public goods and common resources?

A:

• Public goods are non-rival (no competition for use)

• Common resources are rival (competition for use)

• Both are non-excludable

Why do markets fail to provide public goods efficiently?

A:
Because of the free-rider problem — individuals benefit without paying, so private firms have no incentive to produce them

What is the free-rider problem?

A:
When people benefit from a good without paying, leading to underproduction by private markets (e.g., street lighting)

Which type of good suffers from the free-rider problem and why?

A:
Public goods, because they are non-excludable — people can't be prevented from using them even if they don’t pay

How does the government solve the free-rider problem?

A:
By taxing and providing public goods directly (e.g., police, national defense, weather satellites)

What’s the efficient quantity of a public good?

A:
Where marginal social benefit (MSB) = marginal social cost (MSC)

How is the MSB for a public good calculated?

A:
By vertically summing individuals’ marginal benefit curves (since multiple people can use the same unit)

What does the intersection of MSB and MSC curves represent?

A:
The efficient quantity of the public good — maximizing net social benefit

Which type of good is most at risk of overuse or depletion?

Common resources, due to the tragedy of the commons.

Why are private markets good at providing private goods but not public goods?

A:
Because firms can charge for private goods, making a profit, but can’t prevent free-riders from using public goods.

Why don’t private firms provide efficient amounts of public goods?

A:
Because they can’t charge everyone who benefits, so they can’t make enough profit to cover costs.

What is the typical result of the free-rider problem in the market?

The market provides too little of the public good — underproduction.

What is an example of a public good affected by the free-rider problem?

A:
Street lighting — people benefit from it whether they pay or not.

What role does the government play in addressing the free-rider problem?

A:
The government determines and funds the quantity of public goods through taxes to reach the efficient level.

What economic condition justifies government provision of public goods?

A:
When the marginal social benefit exceeds the marginal private benefit, causing a market failure.

How does the free-rider problem cause deadweight loss?

A:
By leading to underproduction, the total social benefit is less than it could be, creating lost gains from trade.

What’s a real-world consequence of ignoring the free-rider problem?

A:
Essential services like national defense or disease tracking might be underfunded or unavailable if left to the market.

What is an external benefit (positive externality)?

A:
A benefit received by someone who is not directly involved in the production or consumption of a good or service.

What’s an example of a good with external benefits?

A:
Education — it benefits the individual and society (e.g., higher productivity, lower crime)

How do external benefits lead to market failure?

A:
The market underproduces goods with external benefits because private buyers only consider their private benefit, not the full social benefit

In the case of external benefits, how do marginal benefit curves compare?

A:
Marginal Social Benefit (MSB) is greater than Marginal Private Benefit (MPB).

What is the result of this market failure?

The market equilibrium quantity is less than the efficient quantity.

How can public policy correct underproduction due to external benefits?

A:
Through government intervention, such as subsidies, public provision, or regulations.

What is a subsidy, and how does it help?

A:
A payment that reduces the cost for producers or consumers, encouraging more production or consumption of a good with external benefits.

• Context: Electric cars reduce air pollution and greenhouse gas emissions—positive externalities for society.

• Subsidy: Governments often offer tax credits or direct subsidies to consumers who buy EVs, or to manufacturers who produce them.

• Effect: This lowers the cost for consumers, encourages more purchases, and increases the use of environmentally friendly transportation.

What does efficient quantity mean in this context?

A:
The level of output where Marginal Social Benefit (MSB) equals Marginal Social Cost (MSC).

What is the role of public choice in achieving efficiency?

A:
Public decisions (like voting, policies, and taxes) help align market outcomes with social interests, correcting underproduction.

What happens if the government doesn’t intervene in goods with external benefits?

A:
The good will likely be underproduced, resulting in deadweight loss and missed social benefits.

Why might a government provide a service instead of leaving it to private firms?

To correct market failures, such as underproduction of goods with external benefits or public goods.

What economic concept does the Northlander train service illustrate?

A:
Government provision of services to address market failure and ensure access to essential goods

Why might a private firm not offer a service like the Northlander train?

A:
Because it may not be profitable due to low demand, high cost, or inability to exclude riders (free-rider problem).

What type of market failure might justify the Northlander's public funding?

Positive externalities (e.g. regional economic development, access to healthcare education) and equity concerns.

How can public transportation have external benefits?

It reduces traffic, pollution, and provides mobility to people without cars — benefits spill over to others

What’s one reason the government might continue a train service even if it loses money?

A:
Because the social benefits exceed the private revenue — justifying the cost to taxpayers.

What role does public choice play in providing services like the Northlander?

A:
Voter preferences and political decisions influence which services are publicly provided, based on perceived social value.

What is the risk if the government does not provide a service like a train service?

A:
Underprovision or no service at all, leading to reduced access and opportunity in rural or underserved areas.

How does government provision relate to equity?

A:
It ensures equal access to essential services, even in places where private markets would not operate profitably.