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Chapter 1: Problem 12

In each of the following situations, explain how government intervention could improve society's welfare by changing people's incentives. In what sense is the market going wrong? a. Pollution from auto emissions has reached unhealthy levels. b. Everyone in Woodville would be better off if streetlights were installed in the town. But no individual resident is willing to pay for installation of a streetlight in front of his or her house because it is impossible to recoup the cost by charging other residents for the benefit they receive from it.

Short Answer

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Short Answer: In situation a, pollution from auto emissions is an example of a negative externality, causing a market failure. A possible government intervention is to impose a Pigouvian tax on auto emissions, leading to a reduction in pollution levels and improving society's welfare. In situation b, streetlights in Woodville represent a public good, and the market fails to provide them efficiently because of the free-rider problem. A possible government intervention is to fund the installation and maintenance of streetlights through tax revenues, ensuring community-wide benefits and improved welfare.

Step by step solution

01

Situation a: Pollution from auto emissions

The main problem here is that pollution from auto emissions has reached unhealthy levels, affecting society's welfare. This is an example of a negative externality, which occurs when the actions of one party impose costs on others that are not accounted for in the price of a product or service. In this case, the social cost of driving (including pollution) is higher than the private cost, leading to a market failure.
02

Government intervention for situation a

One possible government intervention to address this market failure is implementing a Pigouvian tax, which is a tax equal to the marginal external cost of pollution. By imposing a tax on auto emissions, the government can force drivers to internalize the social cost of pollution, leading to a reduction in the number of cars on the road or encouraging the use of cleaner transportation alternatives. This would ultimately improve society's welfare by reducing pollution levels and associated health problems.
03

Situation b: Streetlights in Woodville

In this situation, the main problem is that no individual resident is willing to pay for the installation of a streetlight in front of their house, even though the entire community would benefit from it. This is an example of a public good, which is a good that is both non-excludable (people cannot be excluded from benefiting from it) and non-rival (one person's consumption does not reduce its availability to others). The provision of public goods often leads to a market failure because the market cannot allocate resources efficiently in such situations.
04

Government intervention for situation b

One possible government intervention to address this market failure is to provide the public good (streetlights) through tax revenues. By funding the installation and maintenance of streetlights using taxes, the government can overcome the free-rider problem (where no one is willing to pay for the public good) and ensure that the entire community benefits from the streetlights. This would improve society's welfare by providing better lighting and safety in Woodville without relying on individual residents to voluntarily pay for the streetlights.

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Most popular questions from this chapter

This morning you made the following individual choices: you bought a bagel and coffee at the local café, you drove to school in your car during rush hour, and you typed your roommate's term paper because you are a fast typist-in return for which she will do your laundry for a month. For each of these actions, describe how your individual choices interacted with the individual choices made by others. Were other people left better off or worse off by your choices in each case?

In the following examples, state how you would use the principle of marginal analysis to make a decision. a. Deciding how many days to wait before doing your laundry b. Deciding how much library research to do before writing your term paper c. Deciding how many bags of chips to eat d. Deciding how many lectures of a class to skip

In each of the following cases, explain whether you think the situation is efficient or not. If it is not efficient, why not? What actions would make the situation efficient? a. Electricity is included in the rent at your dorm. Some residents in your dorm leave lights, computers, and appliances on when they are not in their rooms. b. Although they cost the same amount to prepare, the cafeteria in your dorm consistently provides too many dishes that diners don't like, such as tofu casserole, and too few dishes that diners do like, such as roast turkey with dressing. c. The enrollment for a particular course exceeds the spaces available. Some students who need to take this course to complete their major are unable to get a space even though others who are taking it as an elective do get a space.

Which of the following situations describes an equilibrium? Which does not? If the situation does not describe an equilibrium, what would an equilibrium look like? a. Many people regularly commute from the suburbs to downtown Pleasantville. Due to traffic congestion, the trip takes 30 minutes when you travel by highway but only 15 minutes when you go by side streets. b. At the intersection of Main and Broadway are two gas stations. One station charges \(\$ 3.00\) per gallon for regular gas and the other charges \(\$ 2.85\) per gallon. Customers can get service immediately at the first station but must wait in a long line at the second. c. Every student enrolled in Economics 101 must also attend a weekly tutorial. This year there are two sections offered: section A and section B, which meet at the same time in adjoining classrooms and are taught by equally competent instructors. Section A is overcrowded, with people sitting on the floor and often unable to see what is written on the board at the front of the room. Section \(\mathrm{B}\) has many empty seats.

In 2012, Hurricane Sandy caused massive destruction to the northeast United States. Tens of thousands of people lost their homes and possessions. Even those who weren't directly affected by the destruction were hurt because businesses failed or contracted and jobs dried up. Using one of the principles of economy-wide interaction, explain how government intervention can help in this situation.
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