05 - Requirements for an Efficient Allocation of Resources...

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Requirements for an Efficient Allocation of Resources Using Markets: Public Goods Contrast Market Success with Market Failure Associated with Externalities. Recall that perfectly competitive markets are characterized by: 1. complete property rights (i.e., no public goods), 2. atomistic participants (i.e., no monopolies), 3. complete information (i.e., rules out inefficiencies from inadequate information), 4. no transactions costs (i.e., rules out externalities). Mankiw #7: Governments can sometimes improve on market outcomes. In Doing So, It Helps to Ask Three Questions 1. To what extent does society want to rely on market processes, and to what extent do they want government intervention? 2. What is the desirable level of public good? (social optimum) 3. What is the most efficient way to get to the social optimum? (i.e., How do we get from private “market” optimum to social optimum?)
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(Environmental) Public Goods Lecture In environmental economics, most externalities are public goods or bads. – “The notion of externality has risen because of its intuitive appeal. I do something for my own benefit, ignoring the fact that my action also affects you. However…most externalities can be viewed as a nonexcludable [public] good or bad being produced by one agent and being consumed by one or more agents. The producer chooses how much to produce based on his or her own calculus. The consumer has no choices since the good or bad is nonexcludable. Air pollution fits into this framework, as does noise, and even externalities such as knowledge.” (Kolstad, 2000 p. 94) Interactive Choice and the “Problem” of Public Goods – Public Goods Experiments – Economics is the study of choice: • Individual [Private] • Group [Interactive] •S o c i a l Role for Public Policy
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Lab Experiment on Provision of Public Goods What does a public goods experiment look like? “ Four male undergraduates from a sociology course are brought to a room and seated at a table. The are each given an endowment of $5. They are told that each can choose to invest all of their $5 in a group project. In particular, each will simultaneously and without discussion put an amount between $0 and $5 in an envelope. The experimenter will collect the “contributions”, total them up, double the amount, and then divide this money among the group. The private benefit from the public goods in this case is one half the total contributions [dollar contributed multiplied by two and divided equally amongst the four students], which is what each receives from the project.
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05 - Requirements for an Efficient Allocation of Resources...

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