PE powerpoint Part BW 5

PE powerpoint Part BW 5 - Public Economics Principles and...

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Public Economics Principles and Practice Part Five Building Economic Foundations Peter Abelson Applied Economics and University of Sydney
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Building Economic Foundations Public Goods Education Externalities and Environment Competition Policy and Industry Regulation Information and Safety
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Chapter 11 Public Goods Framework for Analysis of Public Goods Efficient Supply of Public Goods Revealed Preference Methods of Valuation Stated Preference Methods of Valuation Valuation Methods: Applications and Conclusions
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Nature of Public Goods Public goods includes: Goods providing non-excludable benefits to many people: including public services required for government to function and goods with widespread positive externalities. Non-rival goods. Public goods: Do provide private benefits May be intermediate or final goods Are not resources – in technical definition
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Analysis of Public Goods
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Efficient Supply of Public Goods a) Efficient quantity of private good (Figure 11.1a). a) Efficient quantity of pure public good (non- excludable and non-rival), e.g. street lighting. See Figure 11.1b. Quantity (Q E ) maximises net social benefit. Collective WTP of consumers for an extra unit is equal to marginal cost of supplying that unit. Formally, ΣMRSs = MRT.
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Efficient quantity of private and public goods
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Efficient quantity of non-rival goods Efficient supply of non-rival good. General features of provision. Quantity where P = MC. Figure 11.2, no charge below capacity. Decision whether the bridge should be built: Σ WTP i > cost of building and maintaining bridge In Figure 11.2, this condition is met when trips > Q o.
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Efficient quantity of excludable but non-rival good
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Estimating the Value of Public Goods General valuation principle: estimate willingness to pay or area under the demand curve. If there is a conventional market for a good, we can collect price and quantity data and estimate a market relationship. This is the basic form of revealed preference. See Chapter 6. When there is limited or no market price information, other valuation methods are needed. Revealed preference – other forms Stated preference methods
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Revealed Preference Methods of Valuation The main RP methods are: Market data of various kinds. Hedonic pricing: Housing – environmental goods Product markets - safety Factor markets – education and safety Travel cost studies - recreation Defensive expenditures (avoidance or mitigation expenditures).
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Market data: various kinds Productivity benefits from training or health care – earnings gained Productivity gains for firms – cost savings from water or soil quality improvements Substitutes – value of public housing; recreational facilities Example: value of travel time savings: Business time from wage rates, Leisure time from travel choices
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Hedonic pricing Shows implicit values of attributes of (a) products or (b)
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PE powerpoint Part BW 5 - Public Economics Principles and...

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