microeconomics test chapter 11

What is the essential difference between:
A city police department and Brink's security
Fish in the Pacific Ocean and fish in a fish farm
A live concert and a concert on television
These, and all goods and services, can be classified according to whether they are excludable or nonexcludable and rival or nonrival.

A good, service, or resource is ___if it is possible to prevent a person from enjoying its benefits.
A good, service, or resource is____if it is impossible to prevent a person from benefiting from it.


Examples of ___ items are
The security services of Brink's
Fish in a fish farm
A live concert
Examples of ___ items are
The services of the city police department
Fish in the Pacific Ocean
A concert on network television

A good, service, or resource is___if its use by one person decreases the quantity available to someone else.
A good, service, or resource is __ if its use by one person does not decrease the quantity available to someone else.

Examples of ____items are
The services of Brink's security
Fish both in ocean and in a fish farm
A seat at a live concert
Examples of ___items are
The protection provided by a city police department
A concert on network television

A private good is a good or service that can be consumed by only one person at a time and only by those people who have bought it or own it.
A private good is both rival and excludable.
For example, a can of coke.

A___is a good or service that can be consumed simultaneously by everyone and no one can be excluded from enjoying its benefits.
It is both nonrival and nonexcludable.
For example, a flood-control levee.

A ___is a resource that can be used only once but no one can be prevented from using what is available.
It is both rival and nonexcludable.
For example, fish in the Pacific Ocean.

Natural Monopoly Goods
A good or service that is nonrival but excludable is produced by a natural monopoly.
A natural monopoly is a firm that produces at lower cost than two or more firms can.

Public goods create a free-rider problem.
A ___s a person who enjoys the benefits of a good or service without paying for it.
Because of the free-rider problem, the market would provide too small a quantity of a public good.
To produce the efficient quantity, government action is required.

marginal benefit from a public good

The benefit a public good provides is the value of its services.
Because security lights in a common parking area are nonrival and nonexcludable, they are a public good.
Everyone consumes the same quantity of them.
To find the economy-wide value of the security lights, we add together the marginal benefits of everyone who benefits from them.

___ increases as the quantity of a public good produced increases—the principle of increasing marginal cost.
So the marginal cost curve of a public good slopes upward.

The Efficient Quantity of a Public Good
Resources are used efficiently if marginal benefit equals marginal cost.
If marginal benefit exceeds marginal cost, resources can be used more efficiently by increasing the quantity produced.
If marginal cost exceeds marginal benefit, resources can be used more efficiently by decreasing the quantity produced.

Private Provision: Underproduction

No one would have an incentive to buy his or her share of the satellite system—the free-rider problem.
So a private firm would not supply satellites.


Public Provision: Efficient Production

The political process determines the quantity of a public good provided—this quantity might be efficient or inefficient.

The ___is the tendency for competitors to make themselves identical to appeal to the maximum number of clients or voters.

Public Provision: Overproduction

Bureaucrats translate the choices of politicians into programs and control the day-to-day activities that deliver public goods.
The behavior of bureaucrats modifies the political outcome.

Why don't the politicians block the bureaucrats?
Rational Ignorance
Rational choice balances marginal benefit and marginal cost.
An implication of rational choice is rational ignorance.
___is the decision not to acquire information because the marginal cost of doing so exceeds the expected marginal benefit.

Voter preferences for public goods drive the growth of government.
The demand for national and personal security and the demand for other public goods are ___
As incomes increase, the demand for these services increases by a larger percentage than the increase in income

Part of the reason why government is large is
Inefficient overprovision of public goods
Voters' rational ignorance
There is no easy fix for this problem.
Our ever-growing demand for education and health-care services contribute to the large and growing scale of government.

The____is the absence of incentives to prevent the overuse and depletion of a commonly owned resource.
Examples include the Atlantic Ocean cod stocks, South Pacific whales, and the quality of the earth's atmosphere.
The traditional example from which the term derives is the common grazing land surrounding middle-age villages.

Using the Commons Efficiently
The efficient use of a common resource requires marginal cost to equal marginal social benefit.
To use a common resource efficiently, it is necessary to design an incentive mechanism that confronts users of the common resources with the marginal external cost generated.

Three methods that might be used to achieve the efficient use of a common resource are
Property rights
Production quotas
Individual transferable quotas (ITQs)

property rights

By assigning property rights, ___property becomes private property.
When someone owns a resource, the owner is confronted with the full consequences of her/his actions when using that resource.
The social benefits become the ___benefits.

A ___ is an upper limit to the quantity of a good that may legally be produced in a specified period.
A production quota can achieve an efficient use of a common resource if it is set equal to total production at the quantity at which marginal social benefit equals marginal cost.
Figure 11.9 illustrates how a production quota works.

An _____(ITQ) is a production limit that is assigned to an individual who is free to transfer the quota to someone else.
A market in ITQs emerges.
The market price of an ITQ is the highest price that someone is willing to pay for one.
That price equals the marginal social benefit minus the marginal cost..

The market price of an ITQ confronts fishers with the full cost of their catch.
The private marginal cost equals the marginal social cost.
If the efficient quantity of ITQs is assigned, the market price of a quota confronts resource users with a marginal cost that equals the external cost at the efficient quantity.
Figure 11.10 illustrates how ITQs work.