CHAPTER 15
Test Yourself
1. The opportunity cost to society of a trip by a truck is the goods and services that would have been available had the trip not been made. Some of these are forgone because the gasoline used to fuel the truck is not available for other uses. The price paid for the gasoline likely represents this part of the opportunity cost quite well. But some part of the opportunity cost consists of the clean environment forgone because of the truck’s pollutants. This is not included in the price of the gas.
2. The disease raises the opportunity cost of a pound of coffee. It will be efficient for people to switch away from coffee, in order to produce and consume more tea. The increased cost of coffee will be reflected in an increased price, and this in turn will cause consumers to switch to tea.
4. Cleaning a dorm room is a private good, while cleaning the atmosphere is a public good. In the former case, the resident can be excluded from access to the service and use of the room will make it dirty. A clean atmosphere is a public good, because people cannot be excluded from it, and because additional use (by more people coming into the city) does not deplete it. Consequently, no individual has an incentive to pay for it.
5. About $20 million will be spent in the legal battles. If any less were spent, it would be advantageous for another litigant to spend more, since the prize is worth $20 million. Perfect competition eliminates economic profits.
Discussion Questions
2. Public goods provided by a local government include police protection and road maintenance. But some services do not fall into the category of public goods even though they may be provided free, because people could be excluded from them through a pricing mechanism, and because the provision of the service to more people uses up more resources: examples are schools, water supply, and garbage collection.
4. Education has some aspects of a public good because some of the value of a person’s education accrues to that person’s fellow citizens who find their lives improved by living in a society in which other people are educated. They cannot be excluded from this benefit, and they share it equally. But the greatest value of education accrues to the individual who is educated. That person could be excluded from education, by tuition and other charges. And the provision of education to more people requires more resources. So it is better to think of education as having a beneficial externality, rather than as being a public good.