1. The Water Resources Development Act is designed to address a public good issue. Why is transport on the Mississippi River considered a public good?

Because a particular state government that funds the transportation upgrade incurs the cost, but only reaps a share of the benefits, as many different states benefit by unimpeded travel on the Mississippi. As a result, no individual state has an incentive to undertake such a proposal. It is up to the federal government to provide it.

2. As transport costs continue to rise, what will happen to the prices consumers pay for these goods? Illustrate your answer with a graph of supply and demand.

Supply should fall, or shift left, causing prices to rise.

3. Why is it more economical to use larger and larger barges to transport commodities down the river? Wouldn’t it make just as much sense to take two barges, each equal to half the size of the larger barge? Explain.

Economies of scale may accrue by increasing the size of the barge. The size of the barge is a fixed input, and doesn’t require as much variable input—labor, etc—to operate it. More can be transported for a lower average total cost.

©2005  South-Western.  All Rights Reserved   webmaster  |   DISCLAIMER