10.15.08 - ECONOMICS 1 Professor Kenneth Train 10/15/08...

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ECONOMICS 1 Professor Kenneth Train 10/15/08 Lecture 14 ASUC Lecture Notes Online is the only authorized note-taking service at UC Berkeley. Do not share, copy or illegally distribute (electronically or otherwise) these notes. Our student-run program depends on your individual subscription for its continued existence. These notes are copyrighted by the University of California and are for your personal use only. D O N O T C O P Y Sharing or copying these notes is illegal and could end note taking for this course. ANNOUNCEMENTS Problem set 3 is due in the second section meeting in the week of October 20 . LECTURE Today we’re going to talk about another type of market failure: the provision of public goods (PG.) Last time we talked about monopolies and a failure to regulate; we talked about externalities and the wrong level of output. Today we’re going to talk about public goods, where the free market doesn’t work. We’re talking about how the free market is not that great. PUBLIC GOODS What are the conditions when we can’t expect the free market to work correctly? Public goods are an example; let’s look at some definitions: For private goods, when one person gets something another person doesn’t get it. So for rent control, if you live in one unit another person cannot live there. Private goods are exclusive; public goods, though, are not exclusive. Your consuming it does not prevent someone else from consuming it. What’s an example? Student : The military? Right, the military protects everyone. Anything else? Student : Roads. Right, we all can drive on them. What else? Student : Street lights. Right, street crime is reduced and everyone can see. Also radio waves because one person picking up the waves doesn’t prevent anyone else from doing so. There are a lot of these goods. PROVIDING PUBLIC GOODS So the question is, how should we provide these goods? The free market fails miserably in this respect. The first thing is to find out what the optimal thing is from a social perspective; then how the market operates—does it bring us optimality? And if it doesn’t, how do we resolve it? But stepping back, who mentioned roads? Roads are the perfect definition of the liquidity of the public good. Roads can get congested, and so there comes a point when your use of a PG does prevent other people’s use of it. This shows us that public goods can become private goods under certain circumstances.
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ECONOMICS 1 ASUC Lecture Notes Online: Approved by the UC Board of Regents 10/15/08 D O N O T C O P Y Sharing or copying these notes is illegal and could end note taking for this course. 2 What is the socially optimal outcome? Usually it occurs when P = MC. We know that people buy a product until their marginal willingness to pay equals the price, the actual cost of buying the good. Here we’re talking about the MWTP of one person
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This note was uploaded on 07/25/2011 for the course ECON 1 taught by Professor Martholney during the Fall '08 term at Berkeley.

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10.15.08 - ECONOMICS 1 Professor Kenneth Train 10/15/08...

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