Lecture 29 - Announcements HW due Thursday (ch 14) and...

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Announcements HW due Thursday (ch 14) and Monday (ch 16) We’ll finish 17 and 18 before break. 1 of 35
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Chapter 16 Public Goods and Public Choice 2 of 35
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3 of 22 THE SOURCES OF MARKET FAILURE market failure Occurs when resources are misallocated, or allocated inefficiently. The result is waste or lost value. There are four important sources of market failure: (1) imperfect market structure, or noncompetitive behavior, (2) the existence of public goods, (3) the presence of external costs and benefits, and (4) imperfect information.
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4 of 35 PUBLIC (SOCIAL) GOODS public goods (social or collective goods) Goods that are nonrival in consumption and/or their benefits are nonexcludable (or nonexclusive). In an unregulated market economy with no government to see that they are produced, public goods would at best be produced in insufficient quantity and at worst not produced at all. When we talked about the requirements for a market economy, we said that there must be rules concerning ownership of property. Public goods violate those rules. Specifically, it is impossible to prevent people from using such goods.
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5 of 35 PUBLIC (SOCIAL) GOODS nonrival in consumption: One person’s enjoyment of the benefits of a public good does not interfere with another’s consumption of it. Example: National Defense THE CHARACTERISTICS OF PUBLIC GOODS Nonexclusive : Once a good is produced, no one can be excluded from enjoying its benefits. Example: Public art, national defense
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Private, Public Goods, and in Between 1. Private goods Rival in consumption Exclusive Provided by private sector 2. Public goods Nonrival in consumption Nonexclusive Provided by government 6
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Private, Public Goods, and in Between 1. Natural monopoly (I’m not a big fan of this term used here) Nonrival but exclusive With congestion: private goods Provided by private sector or government 2. Open-access good Rival but nonexclusive Regulated by government 7
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Different types of goods 8
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Because of these characteristics there are problems with the provision of public goods. Let’s consider an example: Ernie the Entrepreneur decides to clean up and “beautify” the public parks Faketown. We assume that market research shows that the residents of Faketown want nicer parks and they are willing to pay for it. BUT, not everyone is willing to pay the same amount. Some are willing to pay a lot and some are not willing to pay at all. Ernie however hires a sales force and begins
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This note was uploaded on 06/21/2009 for the course ECON 2005 taught by Professor Zirkle during the Fall '07 term at Virginia Tech.

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Lecture 29 - Announcements HW due Thursday (ch 14) and...

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