L25 - Economics 101:Principles of Microeconomics Professor...

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1 Economics 101:Principles of  Microeconomics Professor Jo Hertel Lecture 25: Finishing up public goods. The challenges of information goods: network externalities, technology, and innovation. Network externalities Innovation and competition Innovation and the government: patents The arms race model of innovation
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2 The demand for public goods (1) For private goods, we get market demand by adding quantities at any price Public goods: as they are non- excludable, we add prices (=willingness to pay) at any quantity p q p q Market demand =MSB Individual demands = individual MPB p q p q Market demand= MSB Individual demands = individual MPB
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3 The demand for public goods (2) For public goods, the socially efficient quantity is found by setting MSC=MSB: q opt The maximal quantity purchased in the market is q’: if consumer A buys q’, consumer B buys 0 p q MC=MSC Society’s demand = MSB q opt q’ A B Public goods are underprovided if left to the market
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4 Public goods and the government The case for government intervention: if the government does not provide PG, there will not be enough PG provided (mostly none at all) When public goods are provided by the government, consumers/citizens no longer make choices about how much to consume: Government sets q opt and charges the total cost via taxes Issues in government provision: Determining the costs and benefits of public goods (i.e. q opt ): as people have an incentive to free-ride, they have an incentive to misrepresent their valuation
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5 Federal spending on public goods,  2004 24.03 455.9 23.1 30.7 64.6 21.8 Health-related research National Defense General Science, Space, and Technology Natural Resources and Environment Transportation General Government Source: Congressional Budget Office, Budget Options, Feb 2005 in billions of $
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6 Aside: not all goods provided by the  government are actually public goods Garbage collection is provided by many municipalities and is paid via taxes, though it is plainly not a public good! The effect of this policy is to set MC garbage = 0 for any quantity (no change in q changes the amount of your taxes) p q of garbage thrown MC Demand for garbage collection = =MSB q current
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7 Garbage collection example (2) Not surprisingly, pay- as-you-throw- programs yield large reductions in garbage tonnage p q of garbage thrown MC Demand for garbage collection = =MSB price per unit p PAYT new q 9,000 communities
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8 Network externalities A good has network externalities if there are positive externalities in one person’s production/ consumption on other producers/consumers, depending on q total Transport networks Communication networks Other technology such as CDs/tapes, computer operating systems, the internet...
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