Unit 1 The Scope of Economic Analysis

(i) Basic Economic Problems

1. Scarcity implies
A. there is no such thing as a free good.
B. competition is inevitable.
C. a lack of proper planning.
D. price is the only viable criterion for the allocation of resources.
(8!"#$
%. &hich one of the follo'ing statements about economic goods is (A)S*+
A. An economic good is a good for 'hich the amount available is less than
amount people 'ant at ,ero price.
B. An economic good is a good that is sub-ect to competition.
C. An economic good is a good for 'hich more of it is not preferred.
D. .one of the above. (8!1"$
/. &hich of the follo'ing statements about competition is (A)S*+
A. &aiting in line is a form of competition.
B. 0he rules of competition de1ne the criteria that determine 'ho 'ins and 'ho
loses.
C. 2rice is the main criterion of competition in a free enterprise economy.
D. 0here is no competition in a socialist economy because resource allocation is
determined by the government. (8!18$
3. 0he 4pen )earning 5nstitute accepted only / """ students out of #" """
applicants. &hich of the follo'ing methods of allocating the places 'ould be
discriminatory+
A. (irst come6 1rst served.
B. 7aising the entrance re8uirements until only / """ applicants 'ere eligible.
C. 7andom selection by computer.
D. All of the above. (9"!18$
1
:. &hich of the follo'ing describe(s$ a ;shortage<+
A. A shortage e=ists 'henever the price is 1=ed by the government.
B. A shortage e=ists 'hen a 8ueue is found.
C. A shortage e=ists 'hen6 at the given price6 the 8uantity demanded e=ceeds
the 8uantity supplied.
D. All of the above. (9"!%1$
#. Scarcity
A. is implied by the e=istence of price.
B. is the same as shortage.
C. applies to all kinds of goods.
D. All of the above. (9%!":$
. &hich of the follo'ing statements about scarcity is (A)S*+
A. Scarcity implies competition.
B. Scarcity doesn<t e=ist in a 7obinson Crusoe economy.
C. Scarcity implies discrimination.
D. Scarcity means 'e 'ant more than the amount available at ,ero price.
(9!"%$
8. &hich of the follo'ing about shortage is correct+
A. Shortage is the same as scarcity.
B. Shortage results form the absence of private property rights.
C. Shortage means not enough of the good is available.
D. 0here is no shortage as described in supply!demand analysis in the real
'orld. (9!"#$
9. A free good
A. is provided by the government free of charge.
B. has no use value and is not preferred.
%
C. is a good the supply of 'hich is so abundant that more of it is not preferred.
D. is a gift of nature. (9!"$
1". 5n a one!man economy6
A. scarcity e=ists.
B. competition is inevitable.
C. transaction costs are positive.
D. .one of the above. (98!%8$
11. (or a resource to be a good6
A. the resource must be limited in 8uantity.
B. having some of the resource must be preferable to having none of it.
C. there must be competition for the resource.
D. All of the above. (99!"3$
1%. Speeding increases the risk of car accidents. 0he observation that some
drivers do e=ceed speed limits implies
A. safety is not a good for these drivers.
B. safety is a free good for these drivers.
C. these drivers are 'illing to substitute speeding for safety.
D. the postulate of constrained ma=imi,ation cannot be used to analy,e the
behaviour of these drivers. (""!"/$
1/. &hich of the follo'ing statements about scarcity and shortage is correct+
A. Scarcity implies shortage.
B. 0he e=istence of market prices implies scarcity.
C. Shortages are caused by reduction in supply.
D. 0here is no scarcity in a one!man economy. ("%!1$
13. Scarcity
/
A. is the same as shortage.
B. does not e=ist in a one!man economy.
C. e=ists for any economic good.
D. e=ists for any and all goods. ("/!"1$
1:. Scarcity implies
A. everything is not enough.
B. there is a shortage6 and 'ithout a shortage there 'ill be no price.
C. than an individual is 'illing to sacri1ce something for something else.
D. a market 'ill emerge. ("3!"1$
1#. Competition 'ill .40 arise if
A. all individual are identical.
B. there is a monopoly in each and every market.
C. there is no market.
D. all goods are free goods. ("3!"%$
1. &hich one of the follo'ing pairings has terms that are closest in meaning+
A. scarcity and shortage.
B. monopoly and competition.
C. private property and social cost.
D. competition and discrimination. (":!"/$
18. &hich of the follo'ing e=ists in a one!man economy+
A. shortage.
B. 2areto Condition.
C. institution.
D. .one of the above. (":!%$
19. 5n a one!man economy6 there 'ill still be
A. property rights.
B. shortage.
3
C. transaction costs.
D. scarcity. ("#!%3$
20. Scarcity implies
A. the market is the most efficient place for allocating resources.
B. shortage if the market does not exist.
C. the concept of equilibrium is essential.
D. some people must be discriminated against in a society. 0!"0#$
MC Answers on Basic Economic Problems
A C D D D A B D C A
D C B C C D D D D D
:
(iii) Price iscrimination
1. 2rice discrimination does .40 re8uire
A. di>erent markets or di>erent customers to be separated.
B. the price elasticities of demand to be e?cient.
C. the seller to be able to distinguish bet'een rich and poor customers.
D. the good to be the same in all markets and produced at the same cost.
(8:!%1$
%. &hich of the follo'ing is an e=ample of price discrimination+
A. land 'ith a vie' being more e=pansive than land 'ithout a vie'.
B. 'orkers demanding higher 'ages on holidays.
C. a theatre charging lo'er prices for students.
D. life insurance companies charging higher premiums for older people.
(8:!%#$
/. Consumer surplus is e=tracted by a monopolistic seller 'hen
A. the seller increases the price of his product during a period of peak demand.
B. members of a club are re8uired to pay membership fees before they are
allo'ed to dine in that club.
C. consumers are prohibited by the seller from buying more than a stipulated
8uantity.
D. All of the above. (8#!"3$
3. 0hird degree price discrimination is conducted by charging di>erent prices to
di>erent customers or to customers in di>erent markets. 4ne of the follo'ing is
.40 price discrimination of this type@
A. 0a=i drivers in Auang,hou collect 7enminbi (7BB$ from local residents and
#
(oreign *=change Certi1cates ((*C$ from foreigners according to the same
nominal meter fee6 although dollar for dollar (*Cs are 'orth more than 7BB
in the black market.
B. Bedical doctors charge di>erent prices to di>erent patients for the same
treatment.
C. Dollar for dollar6 shops in Shen,hen charge a lo'er price if a customer pays
in (*Cs instead of 7BB.
D. 0he B07 in Cong Dong charges students lo'er rates. (8#!":$
:. &hich one of the follo'ing statements about price discrimination is
5.C477*C0+
A. 2rice discrimination allo's a producer to capture some or all of the consumer
surplus.
B. A monopolist tends to produce a larger output 'hen practicing price
discrimination than that 'hen he is using only one price.
C. &hen the market demand facing monopolist lies entirely belo' the average
cost curve6 price discrimination may provide su?cient revenue to cover the
cost of production.
D. 2rice discrimination can only occur if there is only one seller of the good.
(8!1%$
#. &hich one of the follo'ing statements about monopoly is 07E*+
A. A monopolist may su>er losses.
B. 2rice discrimination is al'ays less e?cient than the use of one single price.
C. A monopolist al'ays produces a smaller output than if the dame good is
produced under competition.
D. Bonopoly 'ill not e=ist 'ithout government protection. (8!
1/$
. &hich of the follo'ing is .40 an e=ample of price discrimination+
A. (or the same treatments6 doctors charge rich patients more than poor ones.
B. Aiven the same sho'6 a theatre o>ers discounts for students.

C. Airlines o>er discounts for group tickets.

D. 5n a private school6 scholarships are given to students 'ith better grades.
(88!%:$
8. &hich of the follo'ing statements about price discrimination is (A)S*+
A. 2erfect price discrimination is more e?cient than simple monopoly pricing.
B. 2rice discrimination al'ays results in a higher level of sales.
C. 2rice discrimination may occur in one single market if consumers have
di>erent information costs.
D. 2rice discrimination tends to be more common in the sale of services than it
is in the sale of manufactured goods. (89!
%:$
9. &hich of the follo'ing is .40 a case of price discrimination+
A. (ree tuition is a'arded to some students in a private college.
B. A theatre o>ers lo'er ticket price to students than to non!students for the
same seats.
C. 0he price per orange is cheaper by the do,en.
D. 0ourists in China are charged more for train or airlines fares than local
people. (89!%$
1". A monopolist practicing perfect price discrimination is said to be economically
e?cient because
A. output is increased and sold at a lo'er marginal price.
B. the consumer surplus is fully e=tracted.
C. the marginal use value of the output e8uals its marginal cost of production.
D. the average cost of production is at a minimum. (9"!1:$
11. &hich of the follo'ing is .40 an e=ample of price discrimination+
8
A. A university charges over!aged students higher tuition fees.
B. An electric po'er company charges more for electricity used during peak
hours.
C. 0he Bass 0ransit 7ail'ay sells tickets to students at a discount.
D. A dentist charges di>erent patients di>erent fees for the same treatment.
(9"!%8$
1%. &hich of the follo'ing is .40 an e=ample of price discrimination+
A. 0he Bass 0ransit 7ail'ay in Cong Dong charges higher fares at peak hours.
B. (or the same treatment6 a doctor charges di>erent fees for di>erent patients.
C. A private university in the Enited States grants di>erent amounts of
scholarship funds to di>erent students.
D. 0he Do'loon!Canton 7ail'ay in Cong Dong charges lo'er fares for students
than for non!students. (91!%8$
1/. &hen a monopolist practices perfect price discrimination6
A. the marginal revenue curve 'ill become a hori,ontal straight line.
B. the demand curve 'ill become the marginal revenue curve.
C. the marginal revenue curve 'ill shift to a position belo' the demand curve.
D. the marginal revenue curve and the average revenue curve 'ill coincide.
(9%!19$
13. &hich of the follo'ing statements about price discrimination is true+
A. 2rice discrimination is less e?cient than simple monopoly pricing.
B. 2rice discrimination tends to result in an average price similar to that of
monopoly pricing.
C. 2rice discrimination 'ill not occur in one single market6 even if consumers
have di>erent information costs.
D. .one of the above. (9/!1:$
1:. Ender monopoly pricing or price searching6
A. output 'ill be higher if perfect price discrimination is adopted.
B. average cost is at a minimum.
9
C. the marginal value of the good to consumers al'ays e=ceeds the marginal
cost of production.
D. the monopolist earns a return on his capital at a rate higher than the rate of
interest. (9/!1$
1#. A monopolist practicing perfect price discrimination is
A. ine?cient because it e=tracts all consumer<s surplus.
B. e?cient because the total cost of production is minimi,ed.
C. ine?cient because there e=ists a divergence bet'een private and social
costs.
D. e?cient because the marginal use value to the consumer is e8ual to the
marginal cost of production. (93!1/$
1. *conomic ine?ciency
A. arises due to the ine?ciency of the public sector.
B. arises due to the e=istence of monopolists.
C. does not e=ist if all constraints are fully speci1ed.
D. e=ists even if all constraints are fully speci1ed. (93!%3$
18. 5n a market 'here information cost e=ists6 'hich of the follo'ing is a
necessary condition for price discrimination to be practiced+
A. 7eselling among buyers is prevented.
B. Di>erent buyers have di>erent demand elasticities.
C. 0here is no competition among sellers.
D. .one of the above. (9:!18$
19. &hich of the follo'ing is an e=ample of price discrimination+
A. 0he Bass 0ransit 7ail'ay Corporation charges lo'er fares for senior citi,ens.
B. 0he bank charges civil servants lo'er interest rates on mortgage loans.
C. 0he per!litre price of a larger carton of milk is lo'er than that of smaller one.
D. A can of soft drinks is sold at a higher price in a tutorial centre than in
grocery store.
(9:!
%"$
1"
%". A simple means of price discrimination 'hereby the same type of product is
sold at di>erent prices is to give the various products some such distinguishing
label as economy6 standard and delu=e. 0his is particularly useful 'here the
items cater to di>erent income classes. (Davidson and 7anlett6 Bicroeconomic
0heory$
A. 0he argument is incorrect because income has nothing to do 'ith demand.
B. 0he argument is correct. 5t is a case of third!degree price discrimination.
C. 0he argument is incorrect. 0he products are not the same6 the market is not
separated6 and a poor consumer may buy the delu=e model.
D. 0he argument is correct. A case in point is the various classes of seats
o>ered by airlines. (9#!1:$
%1. &hich of the follo'ing is .40 price discrimination+
A. Bedical doctors charge di>erent prices on di>erent patients for the same
treatment.
B. 5n the Enited States6 1rst!run movies are priced higher than 'hen the same
movies are sho'n later as second runs.
C. A private college charges a F%" """ tuition fee6 but gives almost ever
student a scholarship of varying amounts depending upon needs.
D. 0he Star (erry in Cong Dong does not charge senior citi,ens any fares.
(9#!/"$
%%. &hich of the follo'ing is an e=ample of price discrimination+
A. 0a=i drivers raise their fares during typhoons and rainstorms.
B. 0he charge per -ourney for passengers using B07 stored!value ticket is lo'er
than that for passengers using one!'ay tickets.
C. A supermarket o>ers a higher discount to customers 'ho buy cup noodles in
bulk.
D. A physician charges 'ealthy patients more than poor patients for the same
medical treatment.
(9!%/$
%/. A price searcher practicing perfect price discrimination 'ill produce at an
11
output level 'here
A. total revenue is ma=imi,ed.
B. the average cost curve cuts the marginal cost curve.
C. the rate of return on investment is greater than the market interest rate.
D. marginal use value e8uals marginal cost. (98!%1$
%3. Consider a seller 'ith a constant marginal cost of production as sho'n in the
follo'ing diagram. Ender simple monopoly pricing6 the e8uilibrium price and
8uantity are 21 and G1. 5f the seller adopts all!or!nothing pricing6 the e=tra gain
to him is
A. area 5
B. area 555
C. area 5 and 555
D. area 56 55 and 555 (98!%/$
%:. &hich of the follo'ing is an e=ample of price discrimination+
A. 2roperty agents charge the sellers of Hats commission but do not charge the
buyers.
B. A 1tness centre o>ers certain free services to members only.
C. 0he telephone company charges more for international direct dialing (5DD$
calls during rush hours.
D. 0he Bass 0ransit 7ail'ay Corporation charges students lo'er fares.
(99!1:$
1%
%#. Ender perfect price discrimination6
A. a price searchers< marginal cost curve may be regarded as its supply curve.
B. the marginal use value is higher than the marginal cost.
C. the gain from trade is ,ero at the margin.
D. the marginal revenue curve lies belo' the marginal use value curve.
(99!1:$
%. &ith su?ciently lo' transaction costs6 a monopolist facing an up'ard sloping
marginal cost curve changes from simple monopoly pricing to perfect price
discrimination. (or the last unit of output6 the monopolist 'ill produce at a
IIIII marginal revenue and charge a IIIII price.
A. higher ... higher
B. higher ... lo'er
C. lo'er ... higher
D. lo'er ... lo'er (""!1/$
%8. &hich of the follo'ing constitutes price discrimination+
A. Some private doctors charge senior citi,ens less for the same treatment.
B. A bus company charges di>erent prices for di>erent bus routes to the same
destination.
C. .e'spapers are sold at a lo'er price in the evening than in the morning.
D. A restaurant charges higher prices for the same dishes during Chinese .e'
Jear holidays.("%!%1$
%9. &hich of the follo'ing constitutes price discrimination+
A. A hotel 'ith vacant charges di>erent customers di>erent rates for a similar
or comparable room.
B. An airline charges 1rst class seats a price four times the price of economy
class seats.
C. A restaurant customer pays a lo'er price per dish if he orders from a set
menu than ordering each dish separately.
D. A cup of co>ee is produced at the same cost as a cup of tea6 but the former
1/
is often sold at a higher price than the latter.
("/!1%$
/". Ender perfect price discrimination6
A. the marginal revenue curve is the same as the demand curve.
B. the marginal use value e8uals the marginal cost for the last unit produced.
C. there is no consumer surplus.
D. All of the above. ("/!1/$
/1. &hich of the follo'ing is de1nitely .40 perfect price discrimination+
A. A seller e=tracts consumer surplus fully from each and every customer.
B. A uniform all!or!nothing price is charged by a seller.
C. Bany all!or!nothing prices are charged by a seller.
D. Di>erent club members pay di>erent membership fees. ("3!
13$
/%. &hich of the follo'ing is .40 a case of price discrimination+
A. 4ne may bargain 'ith ta=i drivers to get the ta=i fare do'n.
B. Barber shops double the price of a haircut several days before the Chinese
.e' Jear holiday.
C. Senior citi,ens pay half fares for sub'ay transportation.
D. Some private universities in the Enited States give certain selected students
partial refunds on their tuition fees already paid.
("3!1:$
//. &hich of the follo'ing is an e=ample of price discrimination+
A. A restaurant sells a chicken for F1.""6 'hich is belo' cost6 and adds the cost
of the chicken to the prices of other dishes. .ot all customers order chicken
in this restaurant.
B. All customers bargain 'hen shopping in the same store6 'ith the result that
di>erent customers paying signi1cantly di>erent prices for the same item.
C. Bovie theatres cut the ticket price to half on 0uesdays for the same movie.
D. Cotel room rates are higher during holiday seasons. (":!
11$
13
/3. &hich of the follo'ing pricing practices in movie theatres constitutes price
discrimination+
A. 0ickets for the same movie are charged at di>erent prices in di>erent
theatres.
B. Students and senior citi,ens are charged lo'er ticket prices than regular
customers.
C. 0he ticket price for the 1rst sho' on each day is lo'er than later sho's.
D. All of the above. ("#!18$
/:. All!or!nothing pricing may be regarded as a form of perfect price
discrimination if
A. the average costs for all customers are e8ual.
B. the marginal costs for all customers are e8ual.
C. di>erent all!or!nothing prices are charged by a seller to di>erent customers.
D. the marginal receipts from each and all customers are e8ual.
("#!19$
#%. Consumer surplus is necessarily extracted &hen
A. the same price is charged to all customers.
B. different customers are charged different prices.
C. customers bargain at the same shop.
D. an entrance fee is required before buying. 0!"'($
MC Answers on Price iscrimination
C C B C A C A C C
B A B A C A C
B C C B A A
B B B B C B
1:
Price iscrimination
1!!1 "# $
%t is often sai& that monopoly pricin' lea&s to ine(ciency in
pro&)ction# *hy is this so+ %t is also ar')e& that monopoly
pricin' wo)l& be e(cient if the cost of pricin' (transactin') is
,ero# o yo) a'ree+ E-plain# (1. mar/s)
Bonopolists pricing is said to be ine?cient because the price of the
product is set above the marginal cost of product. 4n one hand6 price is
measure of marginal value 'hich represents the ma=imum a consumer
is 'illing to pay to ac8uire his last incremental unit.
4n the other hand6 marginal cost means the ma=imum value of the
opportunity forgone to produce the last incremental unit. 5f6 at the
margin6 'hat a consumer is 'illing to pay e=ceeds the cost of
production6 then society 'ill gain if the marginal unit is produced. Since
a monopolist stops production 'hen marginal value is still greater than
marginal cost6 this implies that some potential gains 'ill not be
1#
reali,ed. 0hus6 ine?ciency results.
Co'ever6 if transaction costs are ,ero6 then in attempting to ma=imi,e
'ealth by e=tracting consumers< surplus6 a monopolist 'ill adopt a
scheme of perfect price discrimination. 5n this case the marginal value
'ill become the monopolist<s marginal revenue. Cence6 in ma=imi,ing
his 'ealth by e8uating marginal revenue 'ith marginal cost6 marginal
value 'ill also be e8ual to marginal cost. As a result6 all potential gains
'ill be reali,ed. 0hus6 a perfectly!price!discriminating monopolist is
also an e?cient producer.
1!!0 "# $
State an& e-plain the necessary con&itions for price
&iscrimination# (10 mar/s)
2rice discrimination is de1ned as the selling of homogeneous goods to
di>erent buyers at di>erent prices. 5n order to practise price
discrimination6 sellers must be able to
1. Distinguish bet'een buyers 'ith di>erent elasticities. By kno'ing
their elasticities6 sellers can charge higher prices from buyers 'ith
smaller elasticities6 vice versa.
%. Distinguish bet'een buyers 'ith di>erent information. Since their
information costs are di>erent6 sellers can charge higher prices from
buyers 'ith higher information costs6 vice versa.
/. 2revent resale among buyers. 5f not6 lo'er!prices buyers 'ill sell the
goods to higher!priced buyers and price discrimination 'ill become
non!e=istent.
&hen a product is produced at di>erent marginal costs6 or 'hen it is
not e=actly produced by the same producer6 but sold at di>erent
prices6 it is not price discrimination.
1!!1 "# 2
Many retail stores o3er 45)antity &isco)nts6# 7or e-ample8
1
lar'e bo-es of la)n&ry &eter'ent are fre5)ently o3ere& at
lower prices o)nce than smaller bo-es# %t is sometimes ar')e&
that this pricin' arran'ement is a form of price &iscrimination#
(a) *hat is price &iscrimination+ (1
mar/s)
2rice discrimination is de1ned as for the same good6 di>erent
customers are charged di>erent prices6 including di>erent price options
or price structures6 e.g. all!or!nothing pricing or packaging sales.
(b) 9i:en an e-planation of the abo:e &isco)nt practice other
than price
&iscrimination# (; mar/s)
0he above discount practice is not price discrimination. 5t is because
the services concerned for large bo=es and smaller bo=es are di>erent.
As the 8uantities are di>erent6 there 'ill be di>erences in the cost of
e=change. Besides6 the costs of packaging the goods are also di>erent.
Boreover6 the costs of keeping inventories also di>er. Since the per unit
costs of the above processes are lo'er for large bo=es6 the lo'er price
o>ers are not price discrimination.
1!!$ "# <
E:en if the price elasticities of &eman& for a 'oo& in &i3erent
mar/ets are the same8 price &iscrimination may still emer'e
beca)se &i3erent c)stomers ha:e &i3erent information costs#
o yo) a'ree+ E-plain# (= mar/s)
18
5 agree 'ith the statement. 5f di>erent customers have di>erent
information costs about prices6 in the search for bargains or negotiation
for prices they may end up paying di>erent prices for the same good.
(or buyers 'ith higher information costs6 this implies that their time
costs are high in searching for better bargains. Cence6 in order to save
their time for more valuable use6 they 'ill spend less time in 1nding for
better o>ers. 0hus6 they 'ill tend to end up paying higher prices for the
same good.
(or buyers 'ith lo'er information costs6 as their time does not much
valuable alternative uses6 they can a>ord more search for cheaper
o>ers. Cence6 they 'ill tend to end up paying lo'er prices for the same
good. Boreover6 there is no systematic relation established to date
'hich reveals that a buyer 'ith higher information cost 'ith have a
lo'er elasticity of demand.
1!!; "# $
o the followin' cases constit)te price &iscrimination+ E-plain#
(a) >o)n' &ri:ers are char'e& more for motor ins)rance than
are ol&er &ri:ers#
($
mar/s)
0his is not price discrimination because young people are usually more
risky drivers6 thus there is a greater possibility of tra?c accidents. As
more accidents means greater compensation made by the insurance
companies6 this means that the insurance companies incur higher cost
of providing insurance to the young drivers.
(b) Stan&by fares of airlines are m)ch lower than re')lar fares#
($ mar/s)
0his is not price discrimination because the airlines do not provide the
same services to these t'o groups of buyers. 0hose purchasing
standby ticket!holders need to go the airport and 'ait for their turns to
go on board. 0hey spend more time to 'ait than those buying regular!
19
fare air tickets. 4nce the air tickets are booked6 those paying regular
fares are sure of getting on board at the time of the Hight. 5n other
'ords6 those paying standby fares purchase service 'hich is not as
good as those paying regular fares. 0hus this is not price
discrimination.
1!!= "# <
Boo/ p)blishers in the Unite& States often reprint te-tboo/s
for the Asian mar/et8 sellin' them at si'ni?cantly lower prices
in Asia than in the U#S# S)ppose the U#S# an& the Asian e&itions
are tr)ly i&entical (altho)'h act)ally the Asian :ersion )ses
cheaper paper)8 this practice constit)tes a clear case of price
&iscrimination of the thir& &e'ree#
(a) *hat are the necessary con&itions to practice this type of
price
&iscrimina
tion+
(2
mar/s)
" Bonopoly 2o'er@ 0his means that he must face a do'n'ard
sloping demand curve and he has control over the supply.
" 7esale is 5mpossible@ 2revent resale among buyers. 5f not6 lo'er!
priced buyers 'ill sell the goods to higher!priced buyers and price
discrimination 'ill become non!e=istent.
" Di>erent *lasticity of Demand@ Distinguish bet'een buyers 'ith
di>erent elasticities. By kno'ing their elasticities6 sellers can
charge higher prices from buyers 'ith smaller elasticities6 vice
versa.
" Di>erent 5nformation Costs@ Distinguish bet'een buyers 'ith
di>erent information cost. Since their information costs are
di>erent6 sellers can charge higher prices from buyers 'ith higher
information costs6 vice versa.
&hen a product is produced at di>erent marginal costs6 or 'hen it is
not e=actly produced by the same producer6 but sold at di>erent
%"
prices6 it is not price discrimination.
(b) %t has been pointe& o)t (correctly) that the intro&)ction of
the si'ni?cantly cheaper Asian e&ition is &)e to the fact that
copyri'hts are more costly to enforce in Asia than in the
U#S# @ow will this hi'her cost of enforcin' copyri'hts a3ect
the price elasticity of &eman& for te-tboo/s+ E-plain#
(= mar/s)
As the ma-or determinant of elasticity of demand for te=tbooks 'ith
copyrights is the number of close substitutes available6 illegal printing
of a book or photocopying of a book produces close substitutes for the
te=tbook 'ith copyright protection.
5f the cost of enforcing copyrights is high6 more illegal printing or
photocopying of a book 'ill be done. 5n this case6 as demand for
te=tbooks 'ith copyrights 'ill become more elastic as a result of more
close substitutes available.
Cence6 in order to compete 'ith illegal printing or photocopying 'ith
E.S. books6 lo' prices are set for Asian editions.
1!!! "# ;
Airline companies often o:erboo/ Ai'ht they accept more
reser:ations for a Ai'ht than there are a:ailable seats on the
airplane# This sometimes res)lts in a sit)ation where too many
passen'ers arri:e at the airport for the same Ai'ht#
%n the Unite& States8 if this occ)rs8 the airline m)st ma/e a
p)blic anno)ncement that the Ai'ht is o:erboo/e& an& that it
is necessary for some passen'ers to :ol)nteer to chan'e their
reser:ations for later Ai'hts# Compensation will be 'i:en to
any :ol)nteers )s)ally money or a co)pon for an a&&itional
free Ai'ht at a later &ate# %f this &oes not res)lt in eno)'h
:ol)nteers8 then the airline sho)l& ma/e another call for
%1
willin' passen'ers an& anno)nce an increase in the
compensation le:el#
A prominent politician critici,e& this scheme by sayin'8 4%t
h)rts the interests of the lowBincome passen'ers beca)se8
more often than not8 wealthy passen'ers will 'et the seats#6
(a) *ho will 'ain from this o:erboo/in' scheme8 the lowB
income or the wealthy passen'ers+
(< mar/s)
0he lo'!income passengers6 because the 'ealthy passengers tend to
have a higher time cost and it 'ould cost them more to 'ait. 0he lo'!
income passengers 'ho prefer to 'ait for another Hight are6 in general6
compensated by a re'ard more than their 'aiting costs.
(b) *ill the wealthy passen'ers ten& to 'et seats more often
than the lowBincome passen'ers+ *hy or why not+
(; mar/s)
Jes. Again because they have a higher time cost.
0... "# ;
Cep)table stores with bi' names (i#e# anchor stores) often pay
consi&erably lower rentals per s5)are foot than other stores in
a lar'e shoppin' mall# %s this price &iscrimination+ E-plain#
oes a lower rental from an anchor store reAect a lower
income recei:e& by the lan&lor&+ (1.
mar/s)
0his is not a case of price discrimination. 5n vie' of the landlord6 the
cost per s8uare foot incurred in renting to large shopping mall is lo'er.
(or the same area6 higher transaction costs 'ill be incurred if renting to
other stores. Costs include advertising6 bargaining as 'ell as legal
charges. 0hus6 since landlord incurs lo'er transaction costs in renting
%%
to reputable stores6 charging them lo'er rent per s8uare foot is not
price discrimination.
Charging lo'er rental from anchor stores does not reHect a lo'er rental
income received by landlord. Since the anchor stores 'ill attract more
people to the shopping mall6 the other non!anchor stores in the mall
'ill get more business. 0hus6 more people 'ill be attracted to open
stores in the mall. As a result the landlord can ask for higher rental
from other non!anchor stores. 0his may result in a higher income
received by the landlord. As the higher rent for the non!anchor stores
'ill fully or even more than fully compensate the landlord<s reduction
in income as a result of charging a lo'er rent to the anchor store6 a
lo'er rental from an anchor store does not reHect a lo'er income
received by the landlord.
0..1 "# 2
A ?rstBclass airplane tic/et to the Unite& States is sellin' at
fo)r times the price of an economyBclass tic/et# %s this price
&iscrimination+ Mo:ie theatres in @on' Don' sell tic/ets at
m)ch lower prices on T)es&ay than on other wee/&ays# %s this
price &iscrimination+ (2 mar/s)
A 1rst!class plane seat has about three to four times the seating area
of that of the economy class6 and 'ith much better services. So this is
not price discrimination.
0he lo'er movie thicket prices on 0uesday are price discrimination6
because other comparable 'eekdays have higher prices. 0his should
have more to do 'ith di>erent income elasticities of demand than 'ith
the price elasticities of demand.
An alternative answer is not price discrimination. The reason is that
customers are not separated, they can decide by themselves on which
day they would go to see movies and that everyone is charged the
same price on Tuesdays, and that tickets on diferent weekdays are
diferent goods, etc.
%/
0..0 "# <
E-plain whether the followin' cases constit)te price
&iscrimination#
(a) A resta)rant o3ers a set meal that incl)&es se:eral &ishes#
The price of the set meal is lower than the total amo)nt a
c)stomer has to pay if he or&ers the same &ishes
separately# (1 mar/s)
.ot price discrimination because all customers have the same options
of choosing a set meal or ordering the dishes separately6 'ith each
customer facing the same prices.
Besides6 the set meal may entail a 8uantity discount.
(b) A ban/ char'es all its cre&it car& hol&ers an ann)al fee
e-cept for those who are also its &eposit acco)nt hol&ers#
(< mar/s)
.ot price discrimination because the deposit account holders are
letting the bank make money in another 'ay. 0he account holders may
be vie'ed as having paid the annual credit card fees in a disguised
form.
%3
0..1 "# ;
Airlines pro:i&in' Ai'hts from @on' Don' to Shan'hai an&
from Shen,hen to Shan'hai char'es :ery &i3erent fares# The
places8 ser:ices an& &istances are comparable8 b)t fares are
&i3erent# @owe:er8 there are fewer airlines pro:i&in' Ai'hts
from @on' Don' to Shan'hai than from Shen,hen to Shan'hai#
(a) 7lyin' from @on' Don' to Shan'hai comman&s a m)ch
hi'her airfare than from Shen,hen to Shan'hai# %s this price
&iscrimination+ %f yes8 why+ %f not8 why is there a lar'e price
&iscrepancy+ (< mar/s)
0his is not price discrimination because the locations are not the same6
airplanes may not be the same and Cong Dong passengers are free to
choose their point of departure. 0he airfares departing from Cong Dong
are far higher because airlines serving Hights from Cong Dong to
Shanghai are more monopolistic6 andK or because the costs of 'orkers
serving airplanes are far higher in Cong Dong.
(b) An airline operatin' insi&e China may char'e wi&ely :aryin'
fare for the same Ai'ht when the :acancy rate is hi'h# %s this
price &iscrimination+ E-plain# %f this is price &iscrimination8
&oes it ha:e anythin' to &o with &i3erent price elasticities of
&eman&+ E-plain# (< mar/s)
&ith vacancy the opportunity cost of serving an e=tra passenger is
lo'erL ho'ever6 this opportunity cost may be the same for all
passengers. 5f at any moment in time the opportunity cost for serving
each and every passenger is the same6 and if at the same moment in
time6 as a result of vacancy di>erent passengers are paying di>erent
fares6 the case is price discrimination. Co'ever6 if 'ith the same
vacancy each and every passenger is paying the same fares6 but 'ith
di>erent vacancy rates passengers pays di>erent fares6 a higher fare
for lo'er vacancy6 the case is not price discrimination ! it is peak-load
pricing.
2rice discrimination arising from vacancy6 as the seller is eager to 1ll
the vacant seats by charging di>erent prices for di>erent customers6
%:
may not entail di>erent price elasticities of demand.
0..< "# 1
*hat is perfect price &iscrimination+ Co)l& a wealth
ma-imi,in' monopolist pro&)ce )p to the point where mar'inal
cost e5)als mar'inal )se :al)e if the cons)mer s)rpl)s of each
cons)me is not f)lly e-tracte&+ E-plain# (=
mar/s)
2erfect price discrimination means each and every buyer<s consumer
surplus is fully e=tracted by the seller6 and that each buyer pays a
di>erent all!or!nothing price6 or pays according to a di>erent price
schedule.
0here are several 'ays in practicing of perfect price discrimination.
(irst of all6 'hen transaction costs are negligible6 sellers may charge
customers along their BEM curves. Also6 products can be sold on an all!
or!nothing pricing. 5n addition6 monopolist may restrict the sale of a
good 'ith a membership system. 5n other 'ords6 the collection of
membership can help e=tracting consumer surplus.
)e*ertheless+ a &ealth maximi,ing monopolist could produce to the point &here marginal
cost equals marginal use *alue if the consumer surplus of each consumer is not fully
extracted.
%#
Consider a case at &hich the monopolist set a ne& uniform price or the price is regulated
by the go*ernment to be not higher than -
'
+ the hori,ontal price line is .ust the ne& /0
cur*e for the firm. As a &ealth"maximi,ing firm+ the monopolists &ill produce at a point
&here /0 equals the /C. At the last unit+ the output le*el &ill satisfy the condition at
&hich /12 3 /C. At a result+ consumers4 surplus of each consumer is not fully
extracted.
0..< "# 2
@)an' Shan is a famo)s mo)ntain attractin' many :isitors
e:ery year# Eearly all :isitors reach the pea/ of the mo)ntain
by ri&in' cable cars# )rin' wee/&ays a fee of CMB =. per
person is char'e&# )rin' holi&ays the crow& is so lar'e that it
)s)ally ta/es se:eral ho)rs waitin' in line before a :isitor can
'et on the cable car# Un&er the operation of the local
'o:ernment8 the followin' &)alBfee scheme is a&opte& on
holi&ays# 7or :isitors willin' to pay 10. per person (CMB $.
more)8 they can 'o to a separate waitin' room with a m)ch
shorter 5)e)e# All :isitors will reach the pea/ the same &ay8
b)t beca)se the capacity of cable cars is ?-e&8 those payin'
the lower fee of CMB =. will be p)she& f)rther bac/ to wait
lon'er# There has been no riot# Ass)me all :isitors /new abo)t
this &)alBfee an& perfectly anticipate& their waitin' time in
a&:ance#
(a) *ill the total re:en)e recei:e& by the operator be hi'her or
lower with the &)alBfee scheme+ E-plain#
($ mar/s)
0he total revenue 'ill be higher. Since (or on the assumption$ the
marginal 'aiter pays 7BB 8" and his 'aiting time is unchanged6 the
total number of visitors also remains unchanged. 0he total revenue
rises because some intramarginal 'aiters pay the higher fee of 7BB
1%".
(c) %s the &)alBfee scheme a case of price &iscrimination+
%
E-plain# (1 mar/s)
0he dual!fee scheme is not a case of price discrimination because 'ith
di>erent 'aiting times the products are not the same.
0..2 "# 2
%n a store where c)stomers bar'ain for lower prices8 some
c)stomers en& )p payin' hi'her prices than others for the
same 'oo&s# %s this price &iscrimination+ %f not8 why not+ %f
yes8 &oes this reAect &i3erent price elasticities of &eman&+ %f
it &oes not reAect &i3erent price elasticities of &eman&8 what
e-plains why &i3erent c)stomers pay &i3erent prices+
(1. mar/s)
5t is price discrimination if the hours of operation are e8ually busy 'hen
the same goods are sold. 0he price elasticities of demand may or may
not be the same among customers6 and the ones paying higher prices
may not be the ones 'ho have lo'er price elasticities of demand. 0his
price discrimination occurs because information costs6 or bargaining
abilities6 di>er among di>erent customers6 'ith those having higher
information costs or higher search costs tend to pay higher prices.
0..; "# <
4Price &iscrimination is the res)lt of &i3erent price elasticities
of &eman& in &i3erent mar/et#6 *hat &oes this mean+ F3er
%8
another reason for price &iscrimination# (2 mar/s)
- END -
Unit 1. The Problems of Social Cost
1. Suppose a factory pollutes the environment. 5f the right to pollute is 'ell!
de1ned and transferable6
A. the level of pollution is sub-ect to market contracting.
B. pollution 'ill be eliminated.
C. the factory 'ill necessarily increase its production.
D. then6 on e?ciency grounds6 the government should intervene 'hen the right
to pollute is not transacted. (9"!%:$
%. A divergence bet'een private and social costs is .40 'asteful if
A. the ma-ority of people bene1t from the divergence.
B. the cost of eliminating the divergence is greater than the cost of the
divergence itself.
C. people 'ho su>er from the divergence choose not to complain to the
%9
government.
D. the divergence is not e=pected to last for a long time. (9"!
/"$
/. A divergence bet'een private and social costs
A. occurs 'hen one person<s action inHicts damage on another person.
B. cannot be resolved 'ithout government intervention.
C. may be eliminated by market transactions if the action that causes the
damage is a private property right.
D. means ine?cient allocation of resources. (91!"1$
3. &hich of the follo'ing implies a divergence bet'een private and social costs+
A. A factory pollutes the neighbouring housing for 'orkers6 and this housing is
o'ned by the factory.
B. 5ncreasing te=tile e=ports to the ESA leads to higher clothing prices in Cong
Dong.
C. Br. Smith plays the piano 'hich his neighbour loves to hear6 but he plays it so
often that the marginal bene1t of his music to the neighbour is e=actly ,ero.
D. .one of the above. (9%!%%$
:. Suppose the construction of a Hyover causes the value of nearby properties to
fall. 0o attain economic e?ciency6
A. the Hyover builder should compensate the nearby property o'ners.
B. the Hyover builder should install a noise reduction device.
C. the nearby building should be relocated.
D. 0here is not enough information to ans'er the 8uestion. (9%!
%/$
#. .on!price competition arises 'hen
/"
A. the market price is belo' the e8uilibrium price.
B. transaction costs are positive and signi1cant.
C. property rights are not 'ell de1ned.
D. All of the above are correct. (9#!"#$
. A divergence bet'een private and social costs
A. means the 2areto Condition is not satis1ed.
B. is the conse8uence of the market failure.
C. is due to the presence of transaction costs.
D. is due to the lack of government intervention. (9#!"8$
8. Aiven that people have 'ell!de1ned rights to en-oy fresh air6 'hich of the
follo'ing -usti1es the government prohibiting smoking in public areas+
A. Smokers inHict harm on non!smokers.
B. 0he cost of contracting bet'een smokers and non!smokers is prohibitive.
C. 0he rights of non!smokers must be protected at all costs.
D. 5t is impossible to 1nd a ta= schedule to correct the e=ternal e>ects of smoke
pollution. (9#!%1$
9. &hich of the follo'ing statements about property rights is (A)S*+
A. 2roperty rights restrain behaviour.
B. 2roperty rights e=ist only 'hen the market is used for resource allocation.
C. 2roperty rights do not matter if all costs of transaction are truly ,ero.
D. A system of property rights is determined by the nature of transaction costs.
(9#!%8$
1". 0he Diaoyu 5slands issue sho's that
A. there is a cost in de1ning and enforcing property rights.
B. e=change is impossible 'ithout private property rights.
C. demonstrators dissipate rents.
D. All of the above. (9!1%$
11. A common property
/1
A. has no market price.
B. al'ays implies allocative ine?ciency.
C. al'ays has a ,ero consumer surplus.
D. is more commonly found in a communist system. (9!19$
1%. 0he Coase 0heorem states thatL
A. there is no such thing as a divergence bet'een private and social costs.
B. a private property rights system is the best economic system.
C. a divergence bet'een private and social costs 'ill not e=ist if property rights
are private and if transaction costs are su?ciently lo'.
D. a divergence bet'een private and social costs 'ill necessarily e=ist 'ithout a
clear delineation of property rights. (9!
%:$
1/. A pianist plays the piano. Cis neighbour en-oys the music but the pianist
receives no payment from the neighbour. A divergence bet'een private and
social costs occurs in the follo'ing situations *NC*20@
A. 0he more music the pianist plays6 the more the neighbour en-oys the music.
B. 0he more music the pianist plays6 the less the neighbour en-oys the music.
C. 0he neighbour feels that the last minute of the music has a ,ero value.
D. Although the neighbour loves the music6 he feels that it 'ould be better if the
pianist plays a little less. (9!%$
13. A factory dumps 'aste into a farmer<s 'ater supply6 causing signi1cant
damage to the farmer. &ith prohibitive transaction costs in making contracts6
A. the situation may be e?cient and no government intervention is needed.
B. the situation is ine?cient and the factory should not be allo'ed to produce.
C. the farmer should have the right to demand compensation from the factory.
D. the situation is ine?cient and government regulation is the only 'ay to
/%
improve e?ciency.
(98!
1/$
1:. A divergence bet'een private cost and social cost
A. 'ill not e=ist if transaction costs are ,ero.
B. cannot be resolved 'ithout private contracting.
C. implies that income distribution is une8ual.
D. means that the market is ine?cient and re8uires government regulation.
(98!19$
1#. 0he ne' airport in Cong Dong relieves the people living under the old Hight
path from noise pollution6 but causes noise pollution to those under the ne'
Hight path. After the opening of the ne' airport6
A. the value of properties under the ne' Hight path 'ill fall if the noise pollution
is fully anticipated.
B. the value of properties under the ne' Hight path 'ill rise if the noise pollution
is fully anticipated.
C. the respective property values 'ill change if changes in the levels of noise
pollution are not correctly anticipated.
D. the respective property values 'ill not change under any circumstances.
(99!19$
1. 5n the ocean 'here 1shing is sub-ect to common e=ploitation6 the dissipation
of rent
A. 'ill be reduced if all 1shermen have e8ual opportunity costs.
B. 'ill rise 'ith the re8uirement of 1shing licenses.
C. 'ill not be reduced by introducing 1shing regulations.
D. 'ill not e=ist in the total absence of transaction cost. (99!
%"$
18. &hich of the follo'ing implies a divergence bet'een private and social costs+
//
A. Bale students contribute money to'ards buying perfumes for female
students.
B. A student accidentally pours co>ee on a professor<s -acket and says sorry.
C. A husband complains about his 'ife all the time but refuses to get a divorce.
D. A piano player 'ho never receives any payment for his music from his
neighbour al'ays plays the piano that the marginal value of his piano play to
his neighbour is ,ero. (99!%$
19. &hich of the follo'ing statements is 5.C477*C0+
5f information is a free good6
A. e=aminations 'ould be less useful.
B. there 'ould be less price dispersion.
C. the demand for insurance 'ould decrease.
D. middlemen such as property agents 'ould be able to earn more.
(99!/"$
%". 5n a one!man economy6
A. there is no interest.
B. there is information cost.
C. there is no transportation cost.
D. rent is part of cost. (""!"9$
%1. 0he 2areto Condition is violated 'hen
A. certain constraints are neglected in e=plaining behaviour.
B. transaction costs are prohibitively high for market transactions.
C. property rights are not 'ell!de1ned.
D. there is non!price competition. (""!1$
%%. &hich of the follo'ing statements about transaction costs is correct+
A. 0here may be transaction costs even if there is no market transaction.
B. 0ransaction Costs can only e=ist in a society.
C. 0he e=istence of institutions implies the e=istence of transaction costs.
/3
D. All of the above. (""!18$
%/. .e'spaper and maga,ine publishers often increase their sales and incomes
by reporting personal information about famous movie stars 'ho usually do not
receive any 1nancial return from the publishers. Co'ever6 theses movie stars
often bene1t from theses reports 'hich serve as a kind of publicity for them.
&hich of the follo'ing statements is correct regarding this situation+
A. 0here must be a divergence bet'een private and social costs.
B. 0o attain economic e?ciency6 the government should force the party 'ho
bene1ts more from these reports to compensate the other party.
C. 0he marginal bene1ts of theses reports to the t'o parties must be the same
since neither party pays the other.
D. 0he costs of making and enforcing contracts are prohibitively high.
(""!19$
%3. &hen a pianist plays the piano up to a point 'here the marginal value of the
unpaid music to hisKher neighbour is ,ero6
A. private marginal bene1t diverges from social marginal bene1t.
B. the total gain to the pianist and his neighbour is ma=imi,ed.
C. the property rights to the music has to be de1ned for economic e?ciency.
D. the time spent on playing the piano is indeterminate. (""!
%"$
%:. A common property
A. induces non!price competition.
B. is a free good because it has no market price.
C. is a good that can be consumed concurrently by more than one individual.
D. is a good o'ned collectively by more than one individual. (""!
%8$
%#. 5f transaction costs are ,ero6
A. there 'ill be no division of labour.
B. there 'ill not be any consumption and production activities.
C. the choice of contractual arrangements 'ill be indeterminate.
/:
D. there is no risk. (""!%9$
%. 0he presence of transaction costs implies that
A. a planned economy is more e?cient than a market economy.
B. a planned economy is less e?cient than a market economy.
C. the 'orld is al'ays e?cient if all costs of transactions are taken into
consideration.
D. a society al'ays evolves to reduce transaction costs. ("1!
1$
%8. 0he Coase 0heorem implies that
A. 'hen a factory pollutes a neighbourhood6 the society may gain if the
residents in the neighbourhood are re8uired to pay the factory to reduce the
pollution.
B. under private property rights6 resource allocation is al'ays the same.
C. there 'ill be no market if all costs of transactions are ,ero.
D. a system of private property rights is the most e?cient system.
("1!18$
%9. 0he postulate of constrained ma=imi,ation
A. implies the 2areto Condition is al'ays satis1ed if all constraints are speci1ed.
B. is not a hypotheses.
C. is not an observable fact.
D. All of the above. ("%!%$
/". A large lake sub-ect to unrestrained common e=ploitation
A. has no 1sh.
B. has no o'ner.
C. yields no rent for the marginal 1sherman.
D. yields no income. ("/!%#$
/#
/1. 0he construction of a ne' airport generates unpleasant noise for nearby
residents6 and yet the value of nearby properties increases as a result of the
ne' airport. &hich of the follo'ing is correct+
A. 0here may be no divergence bet'een private and social costs.
B. 0he e=istence of both noise damage and increases in property value calls for
a ta= on the one hand and a subsidy on the other.
C. 0here must be a divergence bet'een private and social costs.
D. 0here is de1nitely no divergence bet'een private and social costs.
("/!%$
/%. 0he Coase 0heorem suggests that
A. there is no divergence bet'een private and social costs in a market economy.
B. government interventions6 such as ta=ation and subsidy6 are ine>ective in
correcting any divergence bet'een private and social costs.
C. resource allocation 'ill be ine?cient if private property rights are not clearly
de1ned.
D. .one of the above. ("/!%8$
//. 2roperty rights arise 'henever
A. there is scarcity.
B. there is a society.
C. there is a society 'ith scarcity.
D. production is sub-ect to the la' of diminishing returns. ("3!
%#$
/3. 0he Coase 0heorem assumes the e=istence of private property rights and the
non!e=istence of transaction costs. &hich of the follo'ing statements is
correct+
A. 0his theorem is useless because transaction costs al'ays e=ist.
B. 0his theorem is useful because it describes the nature of the market.
C. 2rivate property rights 'ill al'ays be formed 'hen there are no transaction
costs.
D. 5f there are no transaction costs6 the assumption of private property rights is
/
not necessary.("3!%$
/:. 0ransaction Costs
A. do not e=ist 'ithout market transactions.
B. do not e=ist 'ithout speciali,ation in production.
C. are the same as transportation costs.
D. do not e=ist in a one!man economy. ("3!%8$
/#. A divergence bet'een private and social costs
A. is al'ays the result of government regulations.
B. may still e=ist if all costs of transactions are ,ero.
C. 'ill not e=ist if markets direct the use of all resources.
D. may be interpreted as a divergence bet'een private and social products.
("3!%9$
/. &hich of the follo'ing e=ists in a one man economy+
A. shortage.
B. pareto condition.
C. institution.
D. .one of the above. (":!%$
/8. 0he introduction of a ne' airport near a city as a rule creates noise and
pollution that a>ect the market value of the property nearby. Also as a rule6 the
market value of the nearby property rises because of a substantial increase in
business activities. &hich of the follo'ing is correct+
A. 0here is a divergence bet'een private and social costs6 and ta=es imposed
on airplane take!o>s and landings 'ill reduce this divergence.
B. 0here is a divergence bet'een private and social costs6 and subsidies
a'arded to airplane take!o>s and landings 'ill reduce this divergence.
C. So long as the market value of nearby property continues to rise 'ith
divergence bet'een private and social costs declines.
D. 0here is no divergence bet'een private and social costs as long as the
market value of nearby property rises.
/8
(":!%9$
/9. 0he Coase 0heorem states that
A. if property rights are clearly de1ned6 the divergence bet'een private and
social costs 'ill be eliminated.
B. if property rights are clearly de1ned and the transaction cost is ,ero6 the
divergence bet'een private and social costs 'ill be eliminated.
C. if all costs of transaction are ,ero6 there may be a divergence bet'een
private and social costs.
D. if property rights are not clearly de1ned6 there 'ill al'ays be a divergence
bet'een private and social costs. (":!
/"$
3". Both elephants and co's are animals 'hich have commercial value. Co'ever6
elephants face the threat of e=tinction 'hile co's do not. 0his is because
A. the price of elephants tusks6 compounded by international prohibition of the
trade6 is not high enough.
B. elephants are usually 'ild animals 'hile co's are raised by people.
C. being large in si,e6 elephants are easy targets for hunters.
D. All of the above. ("#!"9$
31. 0he presence of transaction costs implies that
A. some resources 'ill be allocated ine?ciently.
B. institution 'ill emerge to organi,e resource allocation.
C. there 'ill be no competition.
D. there 'ill be no e8uilibrium. ("#!%:$
3%. &hich of the follo'ing statements about transaction costs is correct+
A. 0ransaction Costs are not measurable because it is not possible measure
transaction costs in dollar and cents.
B. 5t is not necessary to measure transaction costs because they are not
observable.
C. 0o measure transaction costs only a ranking of theses costs under di>erent
situations is re8uired.
D. &hether or not transaction costs are measurable has nothing to do 'ith
/9
deriving testable implications. ("#!%#$
3/. 0'o ad-acent houses have trees e=tending into each other<s garden area. Both
o'ners clear the fallen leaves in their o'n la'ns 'ithout saying anything to
one another. &hich of the follo'ing statements is correct+
A. 0here may be no divergence bet'een private and social costs.
B. 0he marginal damage of these trees to each party must be the same since no
compensation is given.
C. 0here must be a divergence bet'een private and social costs.
D. 0he cost of negotiation bet'een the t'o parties is irrelevant.
("#!%9$
33. A divergence bet'een private and social costs
A. may not e=ist even in the absence of private property rights.
B. 'ill never e=ist 'ith private property rights.
C. 'ill never e=ist 'ith government intervention.
D. may still e=ist even if transaction costs are ,ero. ("#!/"$
5(. 6ransaction costs &ill not exist
A. if e*eryone is truly honest.
B. if a dictator decides on the allocation of resources.
C. in the absence of production.
D. )one of the abo*e. 0!"2%$
5%. Building a high&ay creates a nuisance for the en*ironment nearby. 7and prices near the high&ay
often increase after the announcement of the route. 6his implies that
A. 6he go*ernment has selected the location of the high&ay accurately.
B. 6he benefits deri*es from the high&ay out&eigh the nuisance created.
C. -ollution is ine*itable &hen the economy de*elops.
3"
D. 6here is necessarily a di*ergence bet&een pri*ate and social costs. 0!"#0$
MC Answers on The Problem of Social Cost
A B C C B B
A C C A A C B B
A B A C C A C
A C C C B
B A A B
The Problem of Social Cost
1!!! "# !
%mports of 'oo&s s)ch as cameras8 comp)ters8 :i&eo tapes8
an& GCs that &o not pass tho)'h a)thori,e& @on' Don'
&istrib)tors are /nown as parallel imports# Parallel imports are
not pirate& 'oo&s# The 5)alities of a)thori,e& imports an&
parallel imports are the same# *hile the @on' Don'
'o:ernment has lon' prohibite& the import an& the sale of
pirate& 'oo&s8 it has only recently passe& re')lations which
ma/e the parallel imports of :i&eo tapes an& GCs ille'al#
(a) Ass)min' the new re')lations are strictly enforce&8 who
31
'ains an& who lose+
(;
mar/s)
Authori,ed Cong Dong distributors 'ill gain6 at the e=pense of
customers and unauthori,ed distributors. 0he producers and the Cong
Dong government (ta= collecting agent$6 ho'ever6 may gain or lose. 5f
pirated goods are ignored and if the producers 'ill not be able to
charge higher prices under the ne' regulations6 the producers 'ill lose.
0he government<s ta= revenue based on pro1ts may rise or fall. .ot
surprisingly6 the parties 'ho 'ill likely gain the most are those 1ghting
against pirated goods6 because pirated goods are mainly handled by
unauthori,ed distributors.
(b) @ow wo)l& yo) e-plain the fact that other parallel imports
s)ch as cameras an& comp)ters are not incl)&e& in the new
re')lations+ (; mar/s)
Because items such as cameras are seldom pirated goods. 0he ne'
regulations are apparently enacted under the recent 'ave of
anticipated!goods movement6 to protect the interest of artists and
producers. 5f there is no pirated goods at all6 the ne' regulations may
hurt the producers. But 'ith the abundance of pirated goods6 the
prohibition of parallel imports 'ill bene1t the producers because
pirated goods 'ill be reduced. 2irate producers6 ho'ever6 'ill be
harmed by the ne' regulations.
0..0 "# 2
The *estern @arbo)r T)nnel cost H; billion to b)il&# After
se:eral years of operation the tra(c Aow remains far less than
anticipate&# Since the cost of ser:in' an e-tra car is ,ero8 in
3%
or&er to ma-imi,e wealth8 the t)nnel company simply char'es
a toll per car to ma-imi,e total re:en)e#
(b) Some economists ar')e that if the cost of ser:in' an e-tra
car is ,ero8 as it will be if the t)nnel has no tra(c
con'estion8 then8 to ma-imi,e social bene?t8 no toll sho)l&
be char'e&# The co)nter ar')ment to this is that if no toll is
char'es8 no pri:ate enterprise will b)il& the t)nnel# Eow the
t)nnel is alrea&y b)ilt8 an& s)n/ cost is s)n/# *ill social
bene?t increase if the 'o:ernment p)rchases the t)nnel an&
lets all cars )se it free of char'e+ (<
mar/s)
0he ans'er is Encertain. 0he purchase of the tunnel incurs a cost to
society6 regardless of 'ho pays for it. 5f the government purchases the
tunnel and let all cars use it free of charge6 it is ta=payers 'ho pay for
the use of the tunnel. As 'e cannot kno' 'hether the total value to
the users 'ill cover the purchasing cost of the tunnel6 even if 'e ignore
the cost of operation6 'e cannot kno' 'hether social bene1t 'ill
increase or not. *ven if there is congestion the ans'er 'ill be the same
as 'e have no clear information about the total value of users.
0..$ "# ;
Many people 'o &eer h)ntin'# %t is reporte& that amon' all the
people who 'o &eer h)ntin'8 less than 1. per cent of them (the
s)perior h)nters) 'et more than !. per cent of the h)nte&
&eer8 while the remainin' !. per cent or more of them (the
inferior h)nters) 'et less than 1. per cent8 or each of them 'et
har&ly any &eer# Ass)me for this 5)estion that all people who
'o &eer h)ntin' ha:e the same time cost an& that they enIoy
h)ntin' e5)ally#
(b) As property ri'hts to the &eer in the wil& are not assi'ne&
to any in&i:i&)al or a 'ro)p of in&i:i&)als by law or by
c)stoms8 are there any pri:ate property ri'ht to the &eer in
the wil&+ E-plain# (@intJ %ma'ine an e-treme case where
only one of the participants /nows how to h)nt#)
(2 mar/s)
3/
Jes. 0here are6 property rights to the deer in the 'ild are delineated by
the kno'!ho' or special skills of the less!than!1"!per!cent superior
hunters. 0his is -ust like a strong man occupying a piece of land 'ithout
legal assignment 'ill have an implicit claim to the land if no competitor
can take it a'ay or infringe upon his use rights.
0..$ "# =
S)perBhi'hways for motor :ehicles ha:e been constr)cte& at a
:ery fast pace in mainlan& China# The 5)ality stan&ar&s of
these hi'hways are comparable to those in the Unite& States#
7ees or tolls are ro)tinely char'e& for their )se8 with pri:ate
cars payin' lower tolls than tr)c/s or lorries8 an& lorries are
&i:i&e& into two or three wei'ht cate'ories with &i3erent toll
char'es# The tolls are hi'h# 9enerally spea/in'8 the price (toll)
for )sin' the hi'hways is abo)t the same as the cost of f)el#
(a) *hy ha:e s)perBhi'hways constr)cte& at s)ch a fast pace
in mainlan& China8 faster in fact than what has been
obser:e& in most other co)ntries+ (2 mar/s)
(irstly6 'ith the gro'ing demand to support the charge of substantial or
high tolls6 the source of funding is no longer a serious problem. &hile in
other places6 even 'ith ta= surpluses6 competing or alternative usages
of funds al'ays take a lengthy procedure to sort out the options.
Secondly6 there is in China no democratic voting of the type observed
in most other countries6 hence there is less political delay.
0hirdly6 as most lands are not privately o'ned6 the reclamation of land
for high'ay uses is more straightfor'ard and routine.
(b) %t has been reporte& that in spite of the relati:ely new
s)perBhi'hways in China b)ilt to international stan&ar&s8 the
hi'hways often re5)ire repairs# *hy+ (@intJ *hat &oes
&ama'e ha:e to &o with hi'h toll char'es+) (2
mar/s)
&ith a substantial road toll charged per lorry6 there is a tendency to
33
load each lorry to ma=imum 'eight. 5t is also reported that 'ith
infre8uent installation of 'eighting stations6 many lorries carry loads
e=ceeding the ma=imum allo'ed. 0he routine heavy 'eights of lorries
using the super!high'ays6 prompted by high toll charges6 increase the
fre8uency of road damage.
In 19!, A.". #igou o$ "ambridge advanced the argument that, with a
superior road and an in$erior road, car drivers %ock to use the
superior road and cause tra&c congestion, each driver considers his
own driving time and ignores the damage which he in%icts upon other
drivers by slowing them down. 'ence, there is a divergence between
private and social costs. #igou proposed that the government, by
imposing a
ta( on using the superior road, could induce some drivers to use the
in$erior road that no congestion and society would gain as a result.
In 19), *.'. +night o$ "hicago rebutted #igou,s theses, arguing that
the social cost problem that e(ists actually arises $rom the $act that
the superior road has no private owner. I$ the superior road was
privately owned, +night argued, a toll would be charged $or its use,
e(actly the same as #igou,s road-use ta(, and the divergence
between private and social costs would disappear.
In !!-, it was observed that with very substantial tolls charged $or
the use o$ super-highways in "hina, congestion on these highways
o$ten occurred. Tra&c congestion means drivers are in%icting driving-
time damage upon each other, and this may occur even when
substantial tolls are charged.
(c) The 5)estion isJ *hen con'estion occ)rs with toll char'es8
&oes it means a &i:er'ence between pri:ate an& social cost
m)st remain+ Fr8 to eliminate the &i:er'ence8 is it necessary
to raise the tolls to a le:el that will eliminate con'estion+
(=
mar/s)
*liminate of the divergence does not imply the absence of tra?c
3:
congestion6 i.e.6 drivers inHicting damage upon each other and 'ithout
transactions among themselves does not necessarily imply any
divergence bet'een private and social costs. &hen road tolls are
increased6 congestion 'ill decline. 0he divergence 'ill fall to ,ero 'hen
the bene1t of a reduction in congestion to each driver is e8ual to the
cost of an increase in toll at the margin.
Annual .eport/ There are complications to this answer, such as drivers
are not e0ual in the values o$ their driving time, or that toll-$ree slower
roads may or may not be available as alternatives. These
complications and the simpli$ying assumptions one may make is too
advanced $or this level. The important point is $or a student to see that
the elimination o$ the traditional divergence does not re0uire the
elimination o$ inter-personal damage, 1ust like the $actory pollution
case the elimination o$ the divergence does not re0uire market
transactions among drivers, who in%ict damage upon each other, as
the "oase Theorem would so re0uire. A convenient substitute between
drivers and toll collectors, and it the tolls are properly priced, the
divergence will be eliminated.
0..; "# ;
The @on' Don' 'o:ernment has impose& a strict an& se:ere
noBsmo/in' law8 prohibitin' smo/in' in most p)blic areas#
Milton 7rie&man sai& that each an& e:ery in&i:i&)al sho)l&
ha:e the free&om to harm himself8 incl)&in' committin'
s)ici&eK howe:er8 in &oin' so he may inAict &ama'e on others
an& create a social cost problem# Fne who smo/es ci'arettes
enIoys smo/in'8 b)t may inAict &ama'e on the health of others
nearby#
(a)@ow wo)l& yo) assess the social 'ains an& costs of o)r new
noBsmo/in' law+ Can anyone be certain that the social 'ains
are 'reater than the social costs+
(b) *hat is the rele:ance of the Coase Theorem here+ %n what
3#
sense is this theorem not operati:e in the noBsmo/in' case+
(c)Emissions from a)tomobile en'ines are sai& to inAict far
more &ama'e on health than smo/e from ci'arettes# *hy
&oes the @on' Don' 'o:ernment not impose a noB&ri:in'
r)le+ (11 mar/s)
0..; "# !
%n China8 fees are almost ro)tinely char'e& for facilities8 s)ch
as hi'hways8 to)rist attractions8 p)blic par/s8 an& e:en p)blic
toilets8 s)bIect to p)blic )sa'e# S)ch a feeBchar'in' practice is
sel&om )se& in the Unite& States8 where these p)blic facilities
are wellBmaintaine& an& pro:i&e& to the p)blic free of char'e
by the 'o:ernment#
(a) *o)l& yo) e-pect s)ch p)blic facilities to be constr)cte&L
pro:i&e& more 5)ic/ly or more slowly in China than in the
Unite& States+
(b) *o)l& yo) e-pect the 5)ality an& maintenance of these
facilities8 say p)blic par/s8 to :ary more 'reatly in China
than in the Unite& States+
(c)*o)l& yo) e-pect there to be more or less to)rist ')i&es
ser:in' to)rist attractions in China than in the Unite&
States+ (1$ mar/s)
- END -
Unit 11 P)blic 9oo&s an& Economic E(ciency
(i) Public Goods
3. Subscription (fee!paying$ television programme broadcast by the Cable 0M in
Cong Dong is evidence of the fact that
3
A. a public good is produced by a private enterprise.
B. government action is necessary for reducing the divergence bet'een private
and social costs.
C. free riders can be identi1ed 'ithout cost.
D. a public good becomes a private good 'henever a fee is charged.
(9#!"3$
:. A public good is
A. a free good 'hich can be consumed by an unlimited number of consumers.
B. a common property because no one can e=clude others from using it.
C. a good for 'hich the marginal cost of serving an additional consumer is ,ero.
D. a good for 'hich the marginal cost of producing an additional unit is ,ero.
(9#!1#$
#. A public good
A. cannot be produced e?ciently by private 1rms.
B. is free of charge.
C. can be consumed by many individual at the same time.
D. is the same as a free good. (9!":$
. A public good is
A. a free good.
B. o'ned by the public.
C. produced by the government.
D. amenable for consumption by many individuals at the same time.
(98!%:$
8. &hich of the follo'ing statements about a public good is correct+
A. A public toilet ('ater closet$ is an e=ample of a public good.
B. &hen the marginal cost of serving a good to an e=tra consumer is ,ero6 that
good is a public good.
C. A public good is characteri,ed by the fact that one person<s use of the good
does not reduce the amount available for himself in the future.
38
D. .one of the above. (99!%1$
9. A public good is
A. a good provided by the government but a price is charged.
B. a good that must be produced by the government because it is too costly for
a private producer to sell and collect payments.
C. a good that can be consumed by many individuals at the same time.
D. a good that may be used by the public free of charge. ("1!
1:$
1". &hich of the follo'ing is an e=ample of a public good+
A. books in a public library.
B. a public beach.
C. the music of Bo,art.
D. a piece of abandoned land. ("%!%8$
11. A public good
A. is a free good.
B. may be consumed by many individuals at the same time.
C. is a good produced by a public agent.
D. is a good provided free of charge by the government. ("/!
1$
1%. Basketball star Jao Bing is e=pected to earn a higher income than any other
active professional basketball player because
A. his basketball skills are so good that his salary income 'ill be the highest
among all professional basketball players.
B. television broadcasts and advertisements of sports are public goods and
there are more than 1./ billion Chinese on earth.
C. Chinese are particularly fond of 'atching professional basketball matches6
and no matter 'here Jao Bing plays6 it is al'ays full house because many
Chinese go to 'atch him play.
D. .one of the above. (":!%#$
39
1/. &hich of the follo'ing comes closest to a public good+
A. A public telephone in booth in Central.
B. 0he singing of 0eresa 0ang.
C. 0he City Call )ibrary.
D. 0he public beach at the repulse Bay. (":!%8$
'%. 8hich of the follo&ing is a public good9
A. 6he music of /o,art.
B. A public toilet.
C. A box of candies shared by many people.
D. A lighthouse ser*ing only one boat. 0!"2:$
MC Answers on P)blic 9oo&s
A C C B C C B B B
A A
:"
(ii) Economic Efficiency
1. 0he 2areto Condition states that
A. all marginal value are e8uali,ed.
B. resource reallocation cannot make someone gain 'ithout making someone
else lose.
C. there is no divergence bet'een private and social costs.
D. the distribution of 'ealth satis1es each person in the economy.
(91!"%$
%. &hen the 2areto Condition is satis1ed6 it means
A. 'ealth is evenly distributed.
B. the society<s 'elfare is ma=imi,ed.
C. there is no transaction costs.
D. .one of the above. (9%!%#$
/. 0he 2areto Condition is satis1ed if
A. it is possible to make one individual gain 'ithout making another lose.
B. there is no 'ay to make one individual gain.
C. there is no 'ay to make all individuals e=cept one gain.
D. .one of the above. (9/!"9$
3. Satisfaction of the 2areto Condition implies that
A. marginal use value must al'ays e8ual marginal cost.
B. there is no scarcity of resources.
C. the value of all resources is ma=imi,ed.
D. all costs of transactions are ,ero. ("#!%/$
(. ;conomic efficiency
A. is a result of maximi,ation sub.ect to all rele*ant constraints.
B. implies rapid economic gro&th.
C. implies maximum &elfare for an economy.
:1
D. requires go*ernment inter*ention &hen there is a monopoly in a market. 0!"2!$
MC Answers on Economic E(ciency
B D D C A
P)blic 9oo&s an& Economic E(ciency
1!!1 "# = (c)
Beca)se of the &i(c)lty of collectin' payments from
cons)mers8 a p)blic 'oo& (i#e#8 a 'oo& that can be cons)me&
by many in&i:i&)als at the same time) cannot be pro&)ce& by
a pri:ate enterprise# Say whether it is Tr)e8 7alse8 or
Uncertain# >o) m)st e-plain yo)r choiceK otherwise yo) will
recei:e no mar/ at all# (= mar/s)
0his statement is (A)S*.
5t is because as long as payments can be collected from the users and
the non!paying group can be e=cluded6 a public good can be produced
by a private enterprise.
(or e=ample6 a movie sho'n in a theatre is a public good because it is
amenable to concurrent consumption by many individuals6 yet this
sho' privately produced because payments can be collected. 5n this
case only the paying consumers can obtain the service can obtain the
service and the non!paying public are being e=cluded.
1!!$ "# =
Compact &iscs of pop)lar son's are now bein' repro&)ce& in a
massi:e scale in China# This repro&)ction is ille'al8 an& the
repro&)ce& &iscs are sol& in the mar/et at si'ni?cantly lower
prices than the ori'inal &iscs#
7rom the stan&point of ma-imi,in' social 'ains8 sho)l& the
ille'al practice of repro&)cin' &iscs be ?rmly s)ppresse& so
that only the hi'herBprice& ori'inal &iscs can be fo)n& on the
mar/et+ E-plain# (1. mar/s)
&ith the reproduction of compact discs6 this 'ill result in lo'er prices
:%
'hich come closer to the marginal cost of production. &ith the increase
in consumption6 as long as the marginal use value is positive6 this 'ill
lead to a rise in total use value. Boreover6 such a fall in prices 'ill bring
the marginal use value of consumers closer to the marginal cost.
Cence6 from the standpoint of ma=imi,ing social gains6 the illegal
practice of reproducing discs should not be 1rmly suppressed.
Co'ever6 if the illegal practice of reproducing discs are not be 1rmly
suppressed6 the patent rights of the original discs 'ill not be protected.
5f the resulting income received by the original producers becomes too
lo'6 the discs may not have been produced at all. As the total use
value of the potential users is higher than the cost of producing the
discs6 there 'ill be a fall in social gains if the discs are not produced.
Cence6 from the standpoint of ma=imi,ing social gains6 'hether the
illegal practice of reproducing discs should or should not be 1rmly
suppressed depends on 'hether such illegal practice 'ill end the
production of the original discs.
1!!= "# ;
A&:ertisements pro:i&e correct information as well as false
informationK a&:ertisements may be borin' or they may be
entertainin'# All a&:ertisements are costly to place#
(a) Commercial tele:ision pro'rammes are s)pporte& by
a&:ertisin' sponsors an&8 e-pect for cable TG8 the :iewers
&o not ha:e to pay any fees# %s it really tr)e that :iewers &o
not ha:e to pay any cost at all+ E-plain# (;
mar/s)
By cost6 'e have to consider the full cost borne by vie'ers in 'atching
0M commercials. Since full cost consists of monetary cost as 'ell as
non!monetary cost6 though vie'ers do not need to pay monetary cost6
they pay non!monetary cost in terms of the amount of time spent on
'atching 0M commercials. As the amount of time spent can be used in
:/
other uses6 there is al'ays a cost of 'atching 0M6 i.e. time cost.
Boreover6 since after 'atching the 0M commercials6 the BEM of vie'ers
on the advertised products 'ill usually rise6 the prices of the products
concerned 'ill also rise. 0hus6 vie'ers 'ill have to pay higher prices for
the advertised products.
So6 to conclude6 though vie'ers do not have to pay any fees for 0M
commercials6 they actually pay by their time costs of 'atching the
commercials and by paying higher prices for the advertised products.
(b) Most a&:ertisements in the newspapers are place& an&
pai& for by the sellers of pro&)cts# @owe:er8 in the labo)r
mar/et the a&:ertisements are almost always place& an&
pai& for by the employers or b)yers# *hy is it &i3erin' so
sharply between pro&)ct an& labo)r mar/ets with re'ar& to
who8 the b)yer or the seller8 places a&:ertisements+
(; mar/s)
5n the product market6 since the number of sellers are far fe'er than
the number of buyers6 so it is the sellers 'ho put up advertisements as
it can save transaction costs. As fe'er advertisements 'ill be posted6 it
is easier for buyers to 1nd 'hat they 'ant. Co'ever6 if advertisements
are being posted buyers6 the advertisements 'ill be so numerous and it
is di?cult for sellers to 1nd out 'ho 'ant their products. Cence6 in
order to save transaction costs6 'hether the buyers or sellers 'ho put
up the advertisements depends on the number of buyers and sellers in
the market.
5n the labour market6 buyers are the 1rms hiring 'orkers6 i.e.
employers. 0hey buy advertisements because it can save transaction
costs. Since the sellers in the labour market are the 'orkers6 if
advertisements are made by them6 the transaction costs involved 'ill
:3
become much higher than if they are paid by employers. 5t is because
there are so many 'orkers in the labour market6 if each of them
advertises his serviceL there 'ill be so many advertisements that the
total cost 'ill be e=tremely high. (urthermore6 each buyer 'ill also
have to spend a lot of time reading all these advertisements for
suitable 'orkers.
As the number of buyers are typically fe'er than sellers6
advertisements put up by them can become fe'er and this in turn
saves transaction costs. Boreover6 sellers can 1nd it easier to search
for the information suitable for them.
So6 to conclude6 in order to save searching and information costs6 it is
the buyers of labour services 'ho put up the advertisements instead of
the sellers of labour services.
0..< "# ;
The Chinese 'o:ernment s)bsi&i,es the trainin' of promisin'
athletes# *hen some of the athletes become sports stars8 s)ch
as winners of Flympic 'ol& me&als8 the 'o:ernment is entitle&
to a share of the income (incl)&in' a&:ertisin' income) earne&
by the star athletes thro)'h preBarran'e& contracts between
the 'o:ernment an& the athletes# The Chinese 'o:ernment has
been losin' money in this s)bsi&i,ation b)siness#
Fn the other han&8 in the Unite& States8 pri:ate professional
trainin' centres (s)ch as those for professional tennis players)
e-ist an& they are ma/in' money8 by char'in' relati:ely low
trainin' fees pl)s contracte& shares of the athletes6 f)t)re
::
incomes from the sport#
(a) *hy &oes the Chinese 'o:ernment lose money in trainin'
athletes+ Fn what economic 'ro)n& co)l& this s)bsi&i,ation
be I)sti?e&+ (< mar/s)
0he government loses money in training athletes because she trains
too many of them6 including the less talented athletes as 'ell as those
speciali,ing in sports that have little or no commercial value. 0he
presence of e=ternal e>ects6 such as national pride of glory6 may yield
values to citi,ens at large6 as most if not all Chinese in some measure
en-oy a greater number of gold medals 'on in the 4lympic Aames. 5t
'ould be highly di?cult to collect payments for this type of e=ternal
bene1cial e>ects from all those en-oying the results of the training.
(0ransaction Costs may be mentioned here.$ Does national pride 'orth
something to the citi,ens+ 4f course. But since payments are not
enforced there is no 'ay 'e can assess actually ho' much the citi,ens
'ould be 'illing to pay.
(b) Fn a :ol)ntary trainin' basis (altho)'h sometimes )n&er
press)re)8 Chinese athletes to&ay ha:e won far more 'ol&
me&als in the Flympic 9ames than the earlier perio& when
the trainin' of promisin' athletes was comp)lsory# *hy+
($
mar/s)
Because monetary re'ards are far higher today (direct monetary
re'ards from state and local governments6 as 'ell as from private
donors6 plus indirect commercial re'ards$6 talented athletes voluntarily
come for'ard 'ithout much forcing6 and because of the higher re'ards
they train themselves harder.
(c) o yo) anticipate the trainin' of professional athletes be
con&)cte& thro)'h pri:ate f)n&in' in China in the f)t)re+ %f
so8 which professional sports are most li/ely to be so
:#
f)n&e&+ E-plain# (< mar/s)
Jes6 but it is mainly in individual sports (not team sports$ 'ith high
commercial values. 0here are tennis6 golf6 1gure skating6 diving even
some track and 1eld events spectators love to 'atch or that are good
to advertisement purposes.
B EE B
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