ASSIGNMENT ON PUBLIC GOODS AND EXTERNALITIES

Total Marks: 50

1. Public goods are both nonrival and nonexclusive. Explain each of these terms and
show clearly how they differ from each other.

Non- rivalrous goods are public items issued by the government to a society. They are
characterized as being non rivalrous and nonexcludable. On Rivalrous that individuals
consume, yet their availability is not impacted by the amount they consume. In a nutshell
when an individual or group of individuals use a certain commodity, the supply available for
future consumers is not affected. Non excludable goods that are goods that available to the
public whether or not they pay for them such as public roads, and protection via police
officers. Non excludable goods means that it would be difficult to exclude someone from
using the product or service.

SCENARIO

2. A village is located next to 1000 acres of prime grazing land. The village presently
owns the land and allows all residents to graze cows freely. Some members of the village
council have suggested that the land is being overgrazed. Is this likely to be true? These
same members have also suggested that the village should either require grazers to
purchase an annual permit or sell off the land to the grazers. Would either of these be a
good idea?

a. This is likely to be true since individuals consider only their private cost and not the
▼ socialhistoricpolitical cost of grazing.
b. An annual permit would raise the private cost, which should reduce grazing. And if
the land were privately owned, then the owners would have an incentive not to
overutilize the resource.

3. Assume that scientific studies provide you with the following information concerning
the benefits and costs of sulfur dioxide emissions:

Benefits of abating (reducing) emissions: MB = 500 – 20A

Costs of abating emissions: MC = 200 + 5A

where A is the quantity abated in millions of tons and the benefits and costs are given in
dollars per ton.
a. What is the socially efficient level of emissions abatement?
To find the socially efficient level of emissions abatement, set marginal benefit equal to marginal
cost and solve for A: 500  20A  200  5A A  12 million tons.

b. What are the marginal benefit and marginal cost of abatement at the socially
efficient level of abatement?
Substitute A  12 into the marginal benefit and marginal cost functions to find the marginal benefit
and cost:
MB  500  20(12)  260
MC  200  5(12)  260.

Units of Total benefit

public good Wendy Sara Tom
0 0 0 0
1 20 10 30
2 40 15 50
3 60 20 60
4 80 25 65
5 100 30 67
4. The table above sets out total benefit from a public good for Wendy, Sara,
and Tom, the only people in the society. If the government provided 3
units of the public good, calculate the marginal social benefit.

5. a. What type of good is a highway bridge?

A highway bridge is a public good as it is both non rival and non excludable.
b. Why might a bridge be provided by government rather than privately?
c. a free-rider problem arises with private provision