五常考室 7 - 8

7、The Hong Kong government has imposed a strict and severe no-smoking law, prohibiting smoking in most public areas. Milton Friedman said that each and every individual should have the freedom to harm himself, including committing suicide; however, in doing so he may inflict damage on others and create a social cost problem. One who smokes cigarettes enjoys smoking, but may inflict damage on the health of others nearby.

(a) How would you assess the social gains and costs of our new no-smoking law? Can anyone be certain that the social gains are greater than the social costs?



(b) What is the relevance of the Coase Theorem here? In what sense is this theorem not operative in the no-smoking case?



(c) Emissions from automobile engines are said to inflict far more damage on health than smoke from cigarettes. Why does the Hong Kong government not impose a no-driving rule?

(a) The student is expected to run down the standard divergence-between-private-and-social-costs argument and show how society may gain or lose as a result of this new law.



It is virtually impossible to show whether the social gains are greater or smaller than the social costs in this case, because there is no guideline to properly estimate these gains and costs. When people are not asked or not required to pay, as they do in the market, any such estimate is not reliable.



(b) The relevance of the Coase Theorem here is that if the right to smoke or the right of not getting health damage from smokers is clearly delineated, then market transactions between smokers and non-smokers would occur to settle the divergence. However, given the presence of transaction costs—in this case very high indeed—such market transactions would not occur. The outstanding students, however, would perhaps point out that some restaurants choose to allow smoking, while some prohibit smoking, based on their respective judgements on whichever smoking policy would generate a higher income. In this case, the divergence between private and social costs would in fact be handled through the market, requiring no imposition of the no-smoking law.



(c) The government’s defence must be the costs of no driving being higher than the gains from no emissions. However, since such estimates are also virtually impossible, whatever the government says would have more to do with politics than economics. No politicians in the present world could expect to survive in their positions if they advocate a law prohibiting driving.

8、The school voucher system is a way to subsidize education while allowing students a free choice of schools. At the same time, upon receiving vouchers and turning them into cash from the government, public schools may become private and turn into money-making enterprises.


(a) The proposed school voucher system in Hong Kong kindergartens prohibits the schools receiving vouchers from turning into money-making organizations, i.e. schools receiving vouchers must be non-profit organizations. What would you expect the key differences in kindergarten performance to be, whether or not money-making is allowed?



(b) The government has said that the voucher system is not meant to help school owners make money for themselves. Could schools make profit through the cash-convertible vouchers under competition, if money-making is allowed? Could they earn rent?



(c) Suppose, instead of subsidizing education through the voucher system, the government passes a law, forcing parents to pay fully for their children’s schooling. Would you expect better or worse students to be produced when the schooling is fully financed by parents, as compared with that of the voucher system?

(a) The school voucher system, whether money-making or non-profit, allows school children the free choice of schools, as compared to assignments based on localities or student performance. This will increase competition among schools to recruit students. However, if the schools are non-profit in nature, their incentives would be restricted to recruit enough students to sustain a comfortable survival, with no incentives to further improve the quality of teaching so as to enjoy the sharing of higher incomes. If the schools are money-making organizations, the quality of teaching will vastly improve along with the free choice of schools.



(b) If money-making is allowed, the cash-convertible vouchers, under competition, will not yield profit for any schools, since profit is a windfall, totally unexpected. However, some schools will be earning rents, or imputed rents, attributable to their superior or effective teaching. It is because this rent capturing possibility that the voucher system was strongly urged by the Friedmans, implying the voucher system must be profit-oriented (actually rent-oriented) to blossom.



(c) If the parents are required to pay for their children’s schooling, the quality of students produced will be higher than under the voucher system allowing money making. This is because the parents will drive harder bargains with the schools when they have to pay out of their own pockets, and they will monitor their children to study harder. This is no more than saying customers going to restaurants tend to complain more if they had to pay for themselves, but complain less if they themselves do not have to pay.