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Chapter 3 Review Questions
Q 1 • a. Canada Post: Is it a natural Monopoly? Government involvement in the post office is a way of spreading out the cost of providing mail service to rural areas. Under a free market system, the cost to rural areas would be higher than in urban areas. Government involvement standardizes the costs for all consumers. • b. police departments: There are positive third-party effects to police service. The benefits from police service in a free market system would spill over to all members of the community. Therefore, it is possible that everyone should pay for the service if they are going to benefit from it.
c. Canadian Broadcasting Corporation: The economic rationale behind the CBC is difficult to determine. I believe that the rationale is similar to that of the post office: that is, to provide communication service to people in rural areas or to those who otherwise would not have easy access to information. • d. highways: It may be difficult to charge all those who benefit from a highway. It is possible to have toll roads and charge the users of the highway, but others benefit as well. External benefits include the diversion of traffic away from other areas and products getting to market faster. • e. employment insurance: This is a service that could be provided by the private sector. The rationale centres on economic stabilization and improving the distribution of income.
Q 2 • Education is said to have positive third-party effects. If our labour force is better educated and trained, labour productivity should be higher. This leads to lower prices and better quality products. New technology and new products will tend to come from a better educated population.
Q3 • Those goods and services that can be classified as public goods are better provided by government than by the private sector— i.e. military. • There are positive third-party effects associated with the military. • In the case of natural monopolies, their operation can either be run by government or by a private company. Where a private company provides the service, government usually regulates the price.
Q 5 • Stringent pollution controls would increase the cost of making paper for the mills. This would reduce the negative third-party effects and reduce the external costs on the rest of the community. • However, if paper prices rise, what will be the impact on the quantity of paper demanded? • If these controls were only in effect in one province, mills in other provinces, and in other countries, would have a definite cost advantage
Q 6 • There are positive third-party effects to the fire department. If some people pay for fire protection, others will benefit. • Prior to municipal fire departments, the service was provided by the free market. Insurance companies operated the fire department. What if you didn’t have insurance…third party effect.
Q 7 • In a situation of positive third-party effects, benefits are provided to people other than those involved in the transaction. It is difficult to charge these third parties for the benefits that they receive. • When it is difficult to charge for a service, the service may not be provided. Therefore, the government provides the service because of the external benefits.
Q 8 • Why should everyone earn the same income? Do they provide the same service to society? • What about those with different income needs such as health and family size? • The main difficulty with everyone earning the same income would be a lack of incentive for individuals to improve their position. Also, who would do the unpleasant jobs, if everyone received the same income?
Q 9 • One of the main features of capitalism is competition. When competition is present, there are winners and there are losers. • As the losers drop out of business, competition becomes concentrated in fewer firms. Is this a problem? It is possible that only the most efficient firms will survive and be able to charge a lower price. The remaining firms may be large enough to take advantage of large-scale production. • A problem would present itself if the remaining firms got together to fix prices.
Q 10 • The owners of privately owned farms have an incentive to produce. Workers on state-run farms do not have the incentive to work as hard.
Q 11 • An argument can be made that the responsibility for the poor need not be the responsibility of government. If individuals are concerned about the plight of the poor, possibly they should do something about it instead of turning the responsibility over to government. • Groups, other than government, may also be more efficient in providing this service and may not be saddled with a massive bureaucracy.
Q 12 • Electricity and telephones are good examples of natural monopolies because, for technical reasons, competition in these industries may not make economic sense. If competition meant that existing firms could not take full advantage of economies of large-scale production, then competition may result in the service being more expensive. • The variety and quality of service would likely improve with competition. There is competition in these industries at the retail level but there is only one set of phone lines and one electricity source in your area.
Q 13 • There is less incentive to produce food when prices are kept low by government. Unless government subsidizes growers, there will be food shortages. • In some of the former communist nations, food subsidies represented about 50 percent of the GDP. This leaves little money for other government functions. • It is interesting to note that attempts by government to eliminate subsidies and raise food prices have been met with strong resistance (e.g., by Solidarity in Poland).
Q 14 • The price of the product in the marketplace does not include the possible third-party effects. For example, the price of paper does not include the costs of the pollution created in the paper-making process. • Where third-party effects are present, resources are not allocated efficiently through the price system.
Q15 • A & D
Q 17 • The argument in favour of taxpayers financing a new arena centres around the extra business generated by a professional sports franchise. That is, people are required to sell souvenirs, to sell food at the arena and in the surrounding restaurants, to park cars, etc. • Those who benefit the most from public expenditure on a new arena would be those who patronize the arena and have ticket prices lowered because of the subsidization. The athletes who use the arena also benefit. If the franchise earns more money after the new arena is built, players and owners will make more money. Those companies that have businesses close to the arena will also benefit. • What are the opportunity cost of the funds required to finance a new arena. Studies suggest that the economic spin-offs from such an investment are not that substantial. Taxpayer dollars could be better used in other areas.
Q 18 • The imposition of rent controls is a political decision. The politicians making the decision to impose rent controls will be concerned about public reaction. Politicians are interested in public opinion and keeping their chances for reelection alive. • With more tenants, who support rent controls, than landlords, who are opposed to the controls, the imposition of rent controls becomes a political, and not necessarily an economic, decision.
Q 22 • Price floors raise the price of the product above the equilibrium price. With an elastic demand curve, the quantity demanded will decline more than with an inelastic demand. • Therefore, a greater surplus will occur with an elastic demand curve. In the accompanying diagram, • Qs – Qz is greater than Qs – Q1.
Q 23 • The price should increase more with an inelastic than an elastic demand curve. With an inelastic demand, consumers will not significantly decrease the quantity demanded in response to a price increase.
Q 24 • With a subsidy given to book publishers, the supply curve will shift to the right. This results in a lower price to the consumer. The publisher also receives more money since the company receives $0.50 on top of the price for each book
Q 25 • Some negative third-party effects associated with the automobile are pollution, noise, accidents, and junk machinery.
Q 26 • Governments can encourage more health care in a number of ways. They can provide subsidies for heath-care providers. They can pay for certain health-related procedures. • They can establish health-care standards. It is not necessary for governments to build and operate the facilities in order to play a role in health care.
