Question

Market Failures

1. At ABC Square in downtown Newark, the city charges skaters $3 to use the rink. I.C. Snow, a local community activist, argues that this fee is unfair. She claims that the rink is a public good – it is operated by the city’s Parks and Recreation department, and the construction of the ABC Square area (and the rink itself) was financed with taxpayer money. The director of the Parks and Recreation department has asked you to prepare a response to I.C. Snow’s argument. How will you respond? Is her claim that the rink is a public good valid? Why or why not? Does it make sense to charge a fee for using the rink?
2. Suppose three neighbors must vote on installation of a traffic light that costs $210. All three will share the cost of the light – that is, each person will contribute $70 to the installation. Leona values the light at $50; Lionel values the light at $50; and Theo, who drives the most, values the light at $200.
a) Explain why the traffic light is a public good.
b) Is it efficient for the traffic light to be installed? Why or why not?
c) Suppose a majority rule vote is held to determine whether the light should be installed. Will the light be installed? Explain any differences between this result and your answer in part (b).

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1. Public goods have key characteristics of non rivalry and non excludability. Non rivalry in goods suggests that those goods can be consumed by any individual without affecting the consumption of others. The consumption of one does not affect the consumption of others and hence it has no marginal costs. Similarly non excludability suggests the fact that there is no possibility of exclusion of someone (who has not paid)from the consumption of the good. Since any person can be excluded from using the rink (if he does not pay $3 for its usage)...

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