1. Suppose 1,000 people would each get a benefit of $40 from a levee. Building the levee is socially efficient if its cost is less than $ _________. If the cost is $30,000, a tax of $_________ per person would generate unanimous support for the levee.
2. An external benefit is experienced by _________.
3. A public good is _________ (rival/nonrival) in consumption and _________ (excludable/nonexcludable).
4. The three-clock tower a response to the _________problem caused inefficiency because the _________of a fourth clock was greater than its _________.
5. Paying for a WiFi Network. Consider a small town with 1,000 households. The town could install a wireless WiFi network that would give everyone in town access to the Internet. Each household is willing to pay a maximum of $50 per year for the network, and the cost of the system is $20,000 per year.
a. Is the WiFi system efficient?
b. Suppose the town asks for voluntary contributions to support the network. Would you expect the total contributions to cover the $20,000 cost?
c. Suppose the town keeps track of the contributions and issues passwords to people who contributed at least $20. Would you expect the total contributions to cover the $20,000 cost?
6. Cost Sharing for Monitoring El Niño. Suppose the monitoring of El Niño s current costs a total of $12 billion per decade. Over a decade, early warning of the current s path would reduce its damages by $9 billion in the United States, $6 billion in Canada, and $3 billion in Mexico.
a. Does any country, acting unilaterally, have an incentive to monitor El Niño?
b. Do the social benefits of monitoring exceed the costs?
c. Design a cost-sharing arrangement that will cause all three countries to support a monitoring system.
7. Defenders of Wildlife. Each of the 80,000 citizens in a particular county is willing to pay $0.10 to increase the number of wolf litters by one. Each litter of wolves imposes a cost of $5,000 in livestock losses to ranchers.
a. Is the provision of an additional litter of wolves efficient from the social perspective?
b. Visit the Web site of Defenders of Wildlife. Then design a system that will generate the socially efficient outcome.
8. Class Participation. Consider a course with 40 students, some of whom are confused after the professor explains a concept. The professor doesn’t know whether students are confused but will clarify the concept if one student asks a question. A student who asks a question and reveals his or her confusion loses 10 utils. When the professor clarifies the concept in response to a question, each confused student gets a benefit of 2 utils.
a. At what level of confusion (measured by the number of confused students) is a question from a confused student socially efficient?
b. In the absence of participation incentives, will a confused student ask a question when it would be socially efficient to do so?
c. Design an incentive system to generate efficient questioning.
9. Fireworks as Public Goods. A three-person city is considering a fireworks display. Bertha is willing to pay $100 for the proposed fireworks display, Marian is willing to pay $30, and Sam is willing to pay $20. The cost of the fireworks display is $120.
a. Will any single citizen provide the display on his or her own?
b. If the cost of the fireworks display is divided equally among the citizens, will a majority vote be in favor of the display?
c. Describe a transaction that would benefit all three citizens.
10. Stream Preservation. Consider a trout stream that is threatened with destruction by a nearby logging operation. Each of the 10,000 local fishers would be willing to pay $5 to preserve the stream. The owner of the land would incur a cost of $20,000 to change the logging operation to protect the stream.
a. Is the preservation of the stream efficient from the social perspective?
b. If the landowner has the right to log the land any way he wants, will the stream be preserved?
c. Propose a solution to this problem. Describe a transaction that would benefit the fishers and the landowner.