Micro.Week11.2007 - 11/1 Course evaluations? Now turn to...

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11/1 Course evaluations? Now turn to issue of Government Financing of certain goods. Core issue - why have government at all? After all, with exception of monopoly, we have seen that market works well to maximize NSB or GTS BUT: Obviously need government to make rules and enforce deals Also, there are types of goods where market will “fail” We have already discussed monopoly case. Three other issues: 1. Government as REDISTRIBUTER 2. Government produces PUBLIC GOODS 3. Government deals with EXTERNALITIES
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11/2 1. REDISTRIBUTION Market may generate uneven distribution of income. Classic tradeoff of efficiency and equity: even if market works perfectly, may not like poverty that results fixing poverty often means giving money to poor but problem of “moral hazard” when you insure something, you paradoxically make it more likely example: unemployment insurance (E.I.) assistance to those from disadvantaged regions welfare to fight poverty basic problem is that we cannot disentangle “bad luck” from “irresponsible conduct”
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11/3 2. PUBLIC GOODS There are things that we consume in common. We have already seen issue of “natural monopoly”, where MC of another good is zero. In this case, imagine that we consume same thing together, so that MC of adding one more user = 0 (eg. subway) A better example may be national defense, or a beautiful skyline, or value of “equal opportunity” What is the problem??!! With things we consume in common, who buys them? For a private good (which we do not consume in common), like an apple – if the apple is worth $10 to you and it costs $5 to produce, private market will produce it. Why? You are willing to pay up to $10, and some produce can produce it for $5, so there is a profit to be made if it is NOT being supplied Supply and Demand works!
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11/4 But when there is something that we use together, who buys it? eg. suppose a program that will eliminate dangerous mosquitoes in Toronto, reduce risk of West Nile virus 100 people, each value mosquito program $5 (so total value = $500) cost of program is $200 Who buys it in private market? “Market Failure” Of course, if the individuals could get together and each kick in $2, they would each be ahead by $3, but how to do this?? The obvious answer is to purchase the good collectively, through government We call this kind of good a PUBLIC GOOD Notice two key attributes: 1. MC of one more user = 0 (call this “nonrivalness”) 2. Often impossible to charge, even if you wanted to (note that in natural monopoly you could) (call this nonexcludability)
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11/5 Each of these represents a problem by itself. Notice, the goods we have been talking about up to this week are all RIVAL and EXCLUDABLE Eg. An apple - RIVAL because one user of an apple uses it us, so we cannot add “one more user” EXCLUDABLE because we can charge Consider goods which are RIVAL and NONEXCLUDABLE Eg. Cod fish - RIVAL because one fisherma catching a cod fish “uses it up” NONEXCLUDABLE because we have no
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Micro.Week11.2007 - 11/1 Course evaluations? Now turn to...

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