Question

8. In a study published in 1980, B. B. Gibson estimated the following price and income elasticities of demand for six types of public goods: Price Income State Activity ElasticityElasticity 0.26 0.77 0.92 1.14 1.06 0.99 0.83 Aid to needy people Pollution control Colleges and universities Elementary school aid Parks and recreational areas Highway construction and -0.99 -0.87 maintenance Source: B. B. Gibson, "Estimating Demand Elasticities for Public Goods from Survey Data," American Economic Review (December 1980), pp. 1068-1076. (a) Do these public goods conform to the law of demand? For which public goods is demand price elastic? (b) What types of goods are these public goods? (c) If the price or cost of college and university education increased by 10 percent and, at the same time, incomes also increased by 10 percent, what would be the change in the demand for college 8 and university education? 1 9. Following are the results of four regressions, in 1 which M refers to the imports and Y to the GNP of

Answer 1

(a) Since the price elasticity of all these public goods are negative. This shows inverse relation between their price and quantity demanded, other things remaining constant. This means that all these public goods conform to law of demand.

The demand is elastic when the price elasticity of demand is greater than or equal to one. It is said to be perfectly elastic when Ed=infinity. If we check absolute values in the table we find that price elasticity value Elementary school aid is 1.16 and Highway construction and maintenance is 1.09, this means that the demand for these two public goods is elastic.

(b) Aid to needy people, Pollution control, Colleges and universities, Highway construction and maintenance, All these public goods have values between 0 and +1. These goods will therefore be considered as normal good and also a necessity.

On the other hand public goods like Parks and recreational areas and Elementary school aid have income elasticity values greater than one which means that they can be considered as luxury goods.

(c)

Price Elasticity of demand Ed= % change in demand / % change in price

0.87=%change in demand /10

% change in demand =8.7%

Income elasticity=% change in demand / % change in income

0.92=% change in demand / 10

% change in demand =9.2%