According to a July 14, 2014 post by Sahil Kapur at talkingpointsmemo.com, “The
ID: 1130384 • Letter: A
Question
According to a July 14, 2014 post by Sahil Kapur at talkingpointsmemo.com, “The trust fund for highways and bridges will run dry as early as August if Congress doesn’t renew funding, putting at risk active transportation projects, the White House said. There’s bipartisan agreement that the program’s funding must continue and there are measures in the House and Senate to add $10 billion to the trust through May 2015 and avert insolvency.”
Why might government intervention be required in the private market for highways and bridges? Demonstrate and explain. Be sure to note the characteristics of highways and bridges that give rise to this result.
What is the optimal level of provision (output) for the highways and bridges? Demonstrate and explain. Be sure to state and interpret the optimal condition.
Can the optimal level of provision (output) be attained through voluntary contribution? Explain why or why not. What do we call this problem?
How can the optimal level of provision (output) be attained (i.e. how much should each individual pay to ensure the socially-optimal outcome)? Demonstrate and explain.
Explanation / Answer
Why might government intervention be required in the private market for highways and bridges? Demonstrate and explain. Be sure to note the characteristics of highways and bridges that give rise to this result.
Highways and bridges are public goods and private sector is reluctant to provide such goods. Benefits of public goods are scattered across the times and sectors. Further, such projects have wide positive externalities for economy as whole.
What is the optimal level of provision (output) for the highways and bridges? Demonstrate and explain. Be sure to state and interpret the optimal condition.
Highways and bridges have strong positive ramification for economy as whole. Thus, these projects are judged and assessed based on the monetary benefits. Social cost and benefits are carried out to reach the logical conclusion of such projects.
Optimal condition =
Marginal social cost = Marginal Social benefits.
Can the optimal level of provision (output) be attained through voluntary contribution? Explain why or why not. What do we call this problem?
Voluntary contribution cannot be attained for such projects. People tend to understate their demand for public goods. It is called Free Rider Problem.
How can the optimal level of provision (output) be attained (i.e. how much should each individual pay to ensure the socially-optimal outcome)? Demonstrate and explain.
This is case of free rider issue, thus people would not contribute voluntarily. Here government must levy taxes to ensure the socially optimal outcome.
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