SOLUTIONS TO SELF-CHECK QUESTIONS

12.1 Why the Private Sector Underinvests in Innovation

1. No. A market demand curve reflects only the private benefits of those who are consuming the product. Positive externalities are benefits that spill over to third parties, so they create social benefits, and are not captured by a market (or private benefit) demand curve.
2. Clearly Sony is benefiting from the investment, so the 20% increase in profits is a private benefit. If Sony is unable to capture all of the benefit, perhaps because other companies quickly copy and produce close substitutes, then Samsung’s investment will produce social benefits.
   1. $102 million
   2. If the interest rate is 9%, the cost of financial capital, and the firm can capture the 5% return to society, the firm would invest as if its effective rate of return is 4%, so it will invest $183 million.

12.2 How Governments Can Encourage Innovation

1. 1. Government programs that either pay for neighborhood clean-up directly or that provide reduced tax payments for those who clean up or fix up their own property could be enacted. It is also easy to imagine how a city might allow its businesses to form a group that would pay for and manage neighborhood cleanup.
   2. Government programs that either pay for education directly or that provide loans or reduced tax payments for education could create positive spillovers. A city might allow its businesses to form a group that would coordinate business efforts with schools and local colleges and universities—allowing students to obtain real-world experience in their chosen fields and providing businesses with enthusiastic, trained workers.

12.3 Public Goods

1. 1. Once citizens are protected from crime, it is difficult to exclude someone from this protection, so it is nonexcludable.
   2. Some satellite radio services, such as SiriusXM, are sold by subscription fee, so it is excludable.
   3. Once a road is built it is difficult to exclude people, although toll roads can exclude nonpayers.
   4. Primary education can be provided by private companies and so it is excludable.
   5. Companies sell mobile services and exclude those who do not pay.