1. Explain how charging different groups of consumers different prices for exactly the same commodity can be "good" for society.

As we saw in topic IX, price discrimination allows a profit maximizing monopolist to produce a greater quantity relative to when the monopolist has to charge the same price to every customer. This allows the monopolist to produce an output level where P=MC, the efficient output. The market servers all customers who are willing to pay the MC of providing the good.

2. If a firm produces a positive externality, why don't consumers pay that firm to produce that externality?

It is a problem of incentives. Consumers may free ride on others - hoping that others will pay the firm to produce the externatilities.

3. When consumers receive inoculations for a disease that can be transmitted to others, others benefit. How would this situation be linked to the issue of externalities? What can we say about the number of inoculations that the public receives relative to the social optimum?

Inoculations produce a positive externality. Consumers will not take this externality into account when they decide on whether to receive an inoculation. Thus, there will be fewer inoculations than society would prefer. This is one reason for subsidizing inoculations (possibly making them free).

4. Using the ideas in the question above, analyze the situation where consumers make choices about whether to smoke cigarettes or not.

Second hand smoke is a negative externality. The opposite occurs of what happens with negative externalities - too much smoking. Smokers do not fully take into account the impact of their smoking on others.

5. In terms of economic theory, what is the fundamental problem with common ownership of resources such as forest land, computer space, etc.

A lack of property rights on common property leads individuals to use the resource beyond what is optimal. The basic reason is that when an individual uses the resource it imposes a cost on others - economic theory and evidence suggests that individuals will not make decisions based on the full costs.

6. Have you ever experienced a common pool resource problem in the public computing clusters?

People using computers for games, etc - when others need the computers to complete homework assignments?

7. Recently, some universities have started quota systems which limit the use of computers and copies made by students, charging fees for use over a specified limit. What might this have to do with the issues of common pool resources?

Before there were quotas on printing, there was very little incentive to worry about the amount of printing one did.

8. Have you ever experienced a "free rider" problem when working on a group project?

Most of us have experienced the impact of having a "slacker" in our group - someone who knows they can depend on others to get the job done and benefit from the group effort.

9. Individuals make contributions to charities, churches, public television, etc. Does this mean there is no free rider problem in these situations?

Groups such as churches have found ways to induce members to give. But, just because individuals give doesn't mean the optimal level of giving is achieved.

10. Can you think of any ways that charities, churches, and public television try to reduce the free rider problem?

Make contributions public? Try to increase one's sense of an obligation to give?