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    Private and Public Goods and Optimal Output

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    1. Suppose point A represents the optimal mix of output, that is, the mix of private and public goods that maximizes society's welfare. Because consumers won't demand purely public goods in the marketplace, the price mechanism won't allocate so many resources to their production. Instead the market will tend to produce a mix of output like point B, which includes fewer public goods (OR) is less than optimal.

    In Figure 4.2 (p. 73), by how much is the market
    (a) Overproducing private goods?
    (b) Underproducing public goods?

    5. Secondhand smoke globally kills more than 600,000 people each year, accounting for 1 percent of all deaths worldwide, according to a new study, researchers estimated that annually secondhand smoke causes about 379,000 deaths from heart disease, 165,000 deaths from lower respiratory disease, 36,900 deaths from asthma, and 21,400 deaths from lung cancer. Children account for about 165,000 of the deaths, according to the researchers. The study found that 40 percent of children and 30 percent of adults regularly breathe in
    secondhand smoke. Nationally, secondhand smoke causes 46,000 deaths from heart disease each year. . . .

    If the average adult produces $90,000 of output per year, how much output is lost as a result
    of adult deaths from secondhand smoke, according to the News on page 74?

    (a) Assuming a 10 percent sales tax is levied on all consumption, complete the following table:

    Income Consumption Sales Tax Percentage of Income Paid in Taxes

    $10,000 $11,000
    20,000 20,000
    40,000 36,000
    80,000 60,000

    (b) Is the sales tax (A) progressive or (B) regressive?

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    Solution Preview

    Question 1:
    Since the optimal point of production or private goods is W, we can see that V is more than W, so the market is OVERPRODUCING Private Goods. Since this graph doesn't give numbers of production levels, we can say that the market is ...

    Solution Summary

    Private and public goods and optimal outputs are examined. How the market is effected by overproducing and underproducing private and public goods are determined.