Question
(a) Define the terms public goods, private goods and merit goods with examples. (3 marks)
(b) Some roads can be regarded as public goods, others as private goods. Which type of roads can be provided by the market? Why? Is this a good idea? Explain. (1.5 marks)
(c) The table below gives the costs and benefits of an imaginary firm operating under perfect competition whose activities create a certain amount of pollution. Study the table and answer the following questions. (It is assumed that the costs of this pollution to society can be accurately measured.)
Output (units)
Price per unit $ (MSB)
Marginal ( private) cost to the firm $ (MC)
Marginal external (pollution) costs $ (MEC)
Marginal social costs $ (MSC)
1
100
30
20
2
100
30
22
3
100
35
25
4
100
45
30
5
100
60
40
6
100
78
55
7
100
100
77
8
100
130
110
(i) What is the profit-maximising level of output for this firm? (0.5 mark)
(ii) Calculate MSC and determine the socially efficient level of output? (1 mark)
(iii)Why might the marginal pollution costs increase in the way illustrated in this example? (1 mark) 7 marks
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