Acciona Windpower

Topic: Nonexcludable Skill: Recognition

1) What does it mean for a good to be “nonexclud-

able”? Are private goods nonexcludable? Are pub- lic goods nonexcludable? Are common resources nonexcludable?

Answer: A good is nonexcludable if it is technologi- cally impossible to prevent someone from con- suming it even if they have not paid for it. Private goods are excludable, not nonexcludable. Public goods are nonexcludable. Common resources are nonexcludable.

Topic: Nonexcludable Skill: Recognition

2) What is a nonexcludable good? Give an example.

Answer: A good is nonexcludable if it is impossible (or extremely costly) to prevent someone from benefiting from it. An example of a nonexcludable good is fish in the ocean.

Topic: Nonrival Skill: Recognition

3) What is a nonrival good? Give an example. Answer: A good is nonrival if its use by one person

does not decrease the quantity available for some- one else. An example of a nonrival good is the Internet.

Topic: Nonrival Skill: Recognition

4) When describing goods and services, what is meant by the terms “rival” and “nonrival?” Are private goods rival or nonrival? Are public goods rival or nonrival? Are common resources rival or nonrival?

Answer: A good is rival if its use by one person de- creases its consumption by other people. A good is nonrival if its use by one person does not decrease its consumption by other people. Private goods

are rival. Public goods are nonrival. Common re- sources are rival.

Topic: Public Goods Skill: Conceptual

5) The Wall Street Journal (February 2001) reported

that the government of Thailand “plans to launch a chain of more than 3,000 Thai restaurants world-wide over the next five years, with the larg- est number, more than 1,000, slated for the United States.” The Thai government will have a 30 percent minority stake in the restaurants and the rest will be given to Thai owners. The coun- try’s deputy commerce minister explains that the government will play an active role in drawing up menus, making sure that genuine Thai food is served and ensuring that 70 percent of supplies for the restaurants are imported from Thailand. Because the Thai government will be part owner of these restaurants, are these restaurants public goods?

Answer: Although the government of Thailand has a minority stake in these restaurants, these restau- rants are both rival and excludable. Hence these restaurants are like all restaurants, specifically, they are private goods. In defining a public good, the source of financing is irrelevant. To be a pub- lic good, the good must be nonrival and nonex- cludable and a restaurant is neither.

Topic: Public Goods Skill: Conceptual

6) Is a sailboat purchased in Victoria, British Co- lumbia, a private good or a public good? Answer: The sailboat is a private good. The sailboat

has none of the characteristics of a public good. First, people can easily be excluded from using the boat. Basically, the only people allowed on the boat are the people the owner allows on the boat. Second, the owner’s use of the boat prevents other people from simultaneously using the boat. That

is, the owner’s consumption of the boat decreases the consumption by other consumers.

Topic: Public Goods Skill: Conceptual

7) What are the differences between public goods and private goods?

Answer: Public goods are

♦ nonrival, which means that consumption by one person doesn’t decrease the quantity available for others’ consumption, and

♦ nonexcludable, so that it is impossible or very costly to prevent people from consuming the good even if they did not pay for the good.

In contrast, private goods are

♦ rival, so that consumption by one person decreases the amount available for consumption by another person, and

♦ excludable, which means that it is possible to pre- vent someone from enjoying the benefits of con- suming the good unless they pay for the good.

Topic: Public Goods Skill: Conceptual

8) You are studying with a friend and your friend says, “private goods are excludable and nonrival, while public goods are nonexcludable and rival.” Do you agree?

Answer: No, private goods are excludable and rival, while public goods are nonexcludable and nonri- val. Contrary to what your friend asserted, it is common resources rather than public goods that are nonexcludable and rival.

Topic: Common Resource Skill: Recognition

9) Some resources are private and others are com- mon. Define a common resource, explain the definition, and provide an example of a private re- source and a common resource.

Answer: A common resource is rival and nonexclud- able. Because the resource is rival, if one person uses some of the resource, the person decreases the use of the resource by other people. And because the resource is nonexcludable, it is not possible to prevent someone from using the resource. An ex- ample of a private resource is a gold mine: This resource is rival but is excludable. It is rival be- cause one persons’ use of the gold decreases the consumption of other people. And it is excludable

because the owner of the gold mine can keep any- one out of the mine that he or she wants to keep out of the mine. An example of a common re- source is fish in the ocean. This resource is rival and nonexcludable. It is rival because one person’s catch of a fish decreases the catch of other people. And it is nonexcludable because a fisherman can- not keep anyone from fishing in the river, lake, or ocean.

Topic: Natural Monopoly Skill: Conceptual

10) “The Internet is nonrival, which means it’s a pub- lic good.” Do you agree or disagree? Explain. Answer: The statement is incorrect. A public good is

both nonrival and nonexcludable. Although the

Internet is nonrival, it is excludable, which means that the Internet is a natural monopoly, rather than a public good.

Topic: The Free-Rider Problem Skill: Recognition

11) What is the free rider problem with respect to public goods?

Answer: Because public goods, such as national de- fense, are nonexcludable, a person can enjoy its benefits without paying for it. Such a person is known as a free rider. Because all individuals have the incentive to be free riders, a private, unregu- lated market will produce less than the efficient quantity of a public good because a private firm providing the good cannot collect from free riders.

Topic: The Free-Rider Problem Skill: Recognition

12) What is the free-rider problem? What results from the free-rider problem? What is a solution to the free-rider problem?

Answer: The free-rider problem occurs when people enjoy the benefits from a good or service without paying for it. The free-rider problem occurs with public goods because no one can be excluded from using them without paying for them. As a result, the free-rider problem is that the private market produces too little of these goods. To pro- duce the efficient quantity, the government can intervene by taxing people and using those funds to pay for the public good.

Topic: Benefit of a Public Good Skill: Conceptual

13) What is the marginal benefit of a public good and how is it different from the marginal benefit of a private good?

Answer: The marginal benefit of a public good is the maximum amount that all the people together are willing to pay for one more unit of it, that is, the sum of individual marginal benefits from the good. The marginal benefit of a private good is the maximum amount that a person is willing to pay for one more unit, that is, an individual mar- ginal benefit from the good.

Topic: Benefit of a Public Good Skill: Conceptual

14) “To find the economy’s marginal benefit curve for a public good, we sum the individual marginal benefit curves horizontally.” True or false? Ex- plain.

Answer: The statement is false. To find the econ- omy’s marginal benefit curve of a public good, we sum the individual marginal benefit curves verti-

cally because we need to obtain the sum of what

everyone together is willing to pay for each unit of a public good.

Topic: Benefit of a Public Good Skill: Conceptual

15) Why is society’s marginal benefit curve for a pub- lic good found by vertically summing individual marginal benefit curves and not by horizontal summation as is the case for private goods? Answer: In the case of a private good, producers must

supply one different item to all individuals who demand one; that is, if 10,000 pizzas are de- manded, 10,000 must be produced. Horizontal summation tells us how much in total is de- manded at a certain price. Because public goods are nonrival, producers need only supply one unit in total to all individuals who demand one. Verti- cal summation tells us how much society is will- ing to pay for each unit produced.

Topic: Cost of a Public Good Skill: Conceptual

16) “The principle of increasing marginal cost does not apply to public goods.” Is this statement cor- rect or not?

Answer: The statement is false. For both public goods and private goods, the marginal cost increases as more of the good is produced.

Topic: Private Provision of a Public Good Skill: Conceptual

17) Why isn’t national defense provided by free mar- kets?

Answer: National defense is a public good. This fact means that it is hard to exclude anyone from con- suming the benefits of national defense. If left to the free market, it would be very difficult for pri- vate companies to charge people for protection. People would be unwilling to pay for the service because they can get it without paying. The free- rider problem would make the ability to earn a profit a difficult or impossible prospect and hence little or no defense would be provided.

Topic: Efficient Quantity of a Public Good Skill: Conceptual

18) Protection of rivers in Idaho is a public good. If the marginal cost of protecting rivers in Idaho ex- ceeds the marginal benefit of river protection, is there more than, less than, or the efficient amount of river protection taking place?

Answer: If the marginal cost exceeds the marginal benefit, there is more than the efficient amount of protection taking place. The efficient amount is the quantity such that the marginal benefit equals the marginal cost. Any other amount creates a deadweight loss.

Topic: Efficient Quantity of a Public Good Skill: Conceptual

19) How is the efficient quantity of public goods de- termined?

Answer: The efficient quantity of a public good is determined in the same way as the efficient quan- tity of any good: by comparing marginal cost and marginal benefit, and producing where one equals the other. The marginal cost of a public good is calculated similarly as the marginal cost for a pri- vate good. It is based on the cost of producing one more unit of the good. The marginal benefit, however, is calculated differently for a public good

than for a private good. For a public good, the economy’s marginal benefit is determined by summing the individual marginal benefits at each quantity of the public good. Once the marginal cost and marginal benefits are known, the effi- cient quantity is equal to the quantity such that the marginal cost equals the marginal benefit.

Topic: Principle of Minimum Differentiation Skill: Recognition

20) What is the principle of minimum differentiation? Answer: The principle of minimum differentiation is

the tendency for competitors to make themselves identical to appeal to the maximum number of clients or voters. This principle describes the be- havior of political parties as well as that of busi- ness firms.

Topic: Principle of Minimum Differentiation Skill: Conceptual

21) How does the principle of minimum differentia- tion relate to the free-rider problem?

Answer: The free-rider problem requires that the gov- ernment intervene so that an efficient level of a public good is produced. Often the government itself provides the public good. In this case, politi- cians are the government officials that are respon- sible for deciding which and what amounts of public goods are produced. In order to collect the most votes, politicians choose policies proposing the provision of certain public goods that are similar to competing politicians. The tendency for competitors to choose similar policies is the prin- ciple of minimum differentiation. In this case, the principle of minimum differentiation means that political parties propose to produce similar quan- tities of public goods because these proposals at- tract the maximum number of votes.

Topic: Rational Ignorance Skill: Conceptual

22) What is rational ignorance?

Answer: Rational ignorance is the voter’s decision not to acquire information about an issue because the marginal cost of doing so exceeds the expected marginal benefit. Thus the voter remains (ration- ally) ignorant about the issue.

Topic: Rational Ignorance Skill: Recognition

23) Why is it rational for individuals to be ignorant about public goods but not about private goods? Answer: In the case of a private good, the individual enjoys all of the benefits and pays all of the costs so it is important to gather product information. In the case of a public good, the individual re- ceives only a fraction of the benefits and pays only a fraction of the costs. Moreover, it is uncertain whether one individual’s gathering information will have any impact on the public goods pro- vided anyway.

Topic: Rational Ignorance Skill: Conceptual

24) Explain why some amount of ignorance can be rational.

Answer: Acquiring information is not costless. The rational voter will acquire information only if the expected benefit of the information exceeds the cost of acquiring the information. Often the ex- pected benefit is less than the cost, so the person is “rationally ignorant” about some issues.

Topic: Rational Ignorance Skill: Conceptual

25) Why is watching sports more important to many prospective voters than watching the news? In your answer, mention the role played by rational ignorance and the cost of gathering information. Answer: It takes a great deal of time to learn about all

of the issues that affect our lives. The marginal cost of information gathering can be very high for many people, especially when we are very busy with work, school, personal matters, and so forth. Quite likely the cost of gathering information about sports is less than that of politics. Most as- suredly, it is easy to determine the key elements of sports (e.g., who won, who lost, standings, rank- ings, and so on). It is much more difficult to gather the relevant information about all the de- tails of various policy proposals, plus it is signifi- cantly more likely that the proposals will be changed than is the likelihood that the outcome of an already played game will be changed. Thus people are more likely to remain rationally igno- rant of political events while staying informed about sporting events.

Topic: Inefficient Overprovision Skill: Conceptual

26) Under what conditions will the political process provide an inefficient amount of a public good? Answer: The government will provide an inefficient amount of a public good when voters are ration- ally ignorant of the marginal benefits and mar- ginal costs of the good. In this case, bureaucrats, intent on maximizing the size of their budgets, will provide an inefficiently large quantity of the good.

Topic: Problem of the Commons Skill: Recognition

27) What is the problem of the commons?

Answer: The problem of the commons is the absence of incentives to prevent the overuse and depletion of a commonly owned resource like fish in the oceans and open pasture land upon which anyone can graze sheep. A common resource is rival, so that one person’s use of the resource decreases other people’s use, but nonexcludable, so no one can be prevented from using the common re- source.

Topic: Problem of the Commons Skill: Recognition

28) “The problem with a common resource is that no one gets to use the resource.” Comment on the preceding assertion.

Answer: The assertion is totally false; the problem with a common resource is that too many people use the resource so that it is overused and de- pleted. A common resource is rival, so that one person’s use of the resource decreases other peo- ple’s use, but nonexcludable, so that no one can be prevented from using the common resource. As a result, everyone has the incentive to use the re- source and no one has the incentive to conserve the resource.

Topic: Problem of the Commons Skill: Conceptual

29) Why are fish in the ocean an example of a re- source that suffers from the problem of the com- mons but cattle grazing in a farmer’s pasture do not suffer from the problem of the commons? Answer: Fish in the ocean are a common resource

because they are rival, so that one person catching a fish prevents others from catching the same fish, and they are nonexcludable, so that no one can be

prevented from fishing. As a result, over-fishing is likely to occur. But cattle grazing in a farmer’s pasture are not a common resource. The cattle are rival, so that one person butchering a steer pre- vents others from butchering the same steer, but the cattle are excludable, so that no one can butcher a steer unless the cattle’s owner is com- pensated. As a result, the owner has the incentive to conserve the resource, that is, the owner has the incentive to insure that the cattle are not over- used.

Topic: Marginal Private Benefit Versus Marginal Social Benefit

Skill: Recognition

30) How does the marginal social benefit curve of a common resource compare to the marginal pri- vate benefit curve of the common resource? If there is a difference, why is there a difference? If there is not a difference, why is there not a differ- ence?

Answer: The marginal social benefit curve of a com- mon resource lies below the marginal private benefit curve. The marginal private benefit from a common resource takes account of only the bene- fit accruing to the user of the common resource. But when an additional person uses a common re- source, the additional person decreases the mar- ginal benefit of other users. The marginal social benefit from a common resource adjusts the mar- ginal private by subtracting the decrease in the other users’ marginal benefits. So, the marginal social benefit from use of a common resource is less than the marginal private benefit.

Topic: Quota Skill: Conceptual

31) How does the government determine the quota amount that will produce an efficient use of a common resource?

Answer: The government must determine the mar- ginal social benefit and the marginal (social) cost of the common resource. By equating marginal social benefit to marginal cost, the efficient use of a common resource is determined. A quota is set to this level of production. Producers are assigned a portion of this quota. As long as no one cheats on his or her quota, the efficient outcome occurs.