1) What are the two distinguishing properties of a public good? Explain each in one or two sentences. Give an example of a public good different from any of the examples in your text or my notes.
2) What is the "free rider" problem and how is it related to the distinctive properties of public goods? Why will unregulated markets supply less than the optimum amount of a public good?
3) "We should auction off our national parks and forests to the highest private sector bidders and trust that competition and the profit motive will lead them to allocate these resources to the highest valued uses." Agree or disagree with this statement and explain your answer carefully.
4) When calculating the total social marginal benefit of providing an additional unit of a pure public good, why is correct to simply add up the marginal benefit to each household of that public good?
5) In the diagram below, assume that there are two classes of citizens, the "hawks and the "doves," with different preferences for national defense spending. Assume each group has 50 million households and the lines WTPD and WTPH give the aggregate marginal willingness-to -pay for national defense for each group. Assume that MC measures the marginal cost of reducing the probability that an enemy could land a missile on U.S. soil or otherwise threaten the lives of US non-combatants by chemical attack or conventional warfare.
a) Draw the social marginal benefit curve for society as a whole.
b) Determine the theoretical optimum level of national defense to provide.
c) In theory, what payment scheme would generate general voter satisfaction with this level of National defense spending?
d) Why in practice will no one reveal their preference if the payment scheme in (c) is adopted.
e) Why will both hawks and doves be unhappy with the level of national defense chosen if defense spending is financed by an income tax, even if the theoretical optimum amount of national defense is chosen?
6) In the ‘Classico' Region within Tuscany, all producers of Chianti wine must submit their wines to a government inspection process which certifies that only grapes grown in the Classico region have been used in the wine. All wines which pass this test have a label fixed around the bottle neck (usually with a black rooster on it) guaranteeing the geographic origin of the grapes used in the wine. (D.O.C.G.). Discuss this economic reason for this situation. Who benefits from this labeling requirement for wines grown in this region?