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CHAPTER THIRTY GOVERNMENT AND MARKET FAILURE: PUBLIC GOODS, THE ENVIRONMENT, AND INFORMATION INSTRUCTIONAL OBJECTIVES After completing this chapter, students should be able to: 1. Describe graphically the collective demand curve for a particular public good and explain this curve. 2. Define the optimal quantity of a public good. 3. Identify the purpose of benefit-cost analysis and explain the major difficulty in applying this analysis. 4. Explain what is meant by spillovers or externalities. 5. Describe graphically or verbally how an overallocation of resources results when spillover costs are present and how this can be corrected by government action. 6. Describe graphically or verbally how an underallocation of resources occurs when spillover benefits are present and how this can be corrected by government action. 7. Explain the Coase theorem, its significance, and the three conditions necessary for it to work. 8. Describe three policies that would reduce negative externalities. 9. Use an example to explain a market for pollution rights. 10. Relate the law of conservation of matter and energy to the pollution problem. 11. Describe and give an example of “the tragedy of the commons.” 12. Give an overview of the Superfund law of 1980 and the Clean Air Act of 1990. 13. Using supply and demand diagrams, explain the economics of recycling. 14. Give two examples of how inadequate information about sellers can create a market failure. 15. Explain the moral hazard and adverse selection problems faced by sellers. 16. Define and identify terms and concepts listed at the end of the chapter. LECTURE NOTES I. Introduction A. This chapter examines the topic of market failure introduced in Chapter 5. B. The topic of pollution is discussed in some detail. C. Information failures in the private sector are examined in terms of their implications for government participation in the economy. II. Public Goods: Extending the Analysis 374
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Government and Market Failure: Public Goods, the Environment, and Information A. Public goods are defined as those goods that are indivisible and for which the exclusion principle does not apply. (Recall that the exclusion principle refers to the characteristic of private goods that allows the purchaser of the good to consume or use that product with the ability to exclude others from using it.) B. The demand for public goods differs from the market demand for private goods. 1. It is a “phantom” demand since the purchasers will not be making individual purchases. 2. To find the collective demand schedule for a public good, we add the prices people collectively are willing to pay for the last unit of the public good at each quantity demanded (Table 30-1). 3.
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This note was uploaded on 02/09/2009 for the course ECON 004 taught by Professor Mateer during the Fall '08 term at Northwestern.

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