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Week 11 Public Goods and Externalities

Week 11 Public Goods and Externalities - Public Goods and...

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1 Public Goods and Externalities (TF Chapter 13)
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2 Today’s Agenda Difference between private and public goods The provision of public goods Other types of goods (common resources and natural monopoly products) Externalities Property rights and regulation of externalities Policies that encourage education and research
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3 Market failure Sources of market failure: Government intervention Price ceilings/floors Taxes, subsidies, and quotas Market power (e.g. Monopoly) Public goods Externalities
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4 Private goods We have considered only private goods so far Private goods share two common features: Rivalry in consumption Consumption of the good/service by one person means that another person is less able to consume that good/service Excludability People can be prevented from consuming unless they pay for the good/service
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5 Public goods Public goods are: Non-rivalrous One person’s consumption of the good/service does not detract from another person’s ability to consume it Non-excludable People cannot be prevented from consuming the good/service
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6 The free rider problem Public goods can benefit many people because they are non-rivalrous Public goods are non-excludable, so we cannot force people to pay for them This leads to the free rider problem Those who do not pay for public goods cannot be excluded from consuming them
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7 Provision of public goods If there is a free rider problem , would private firms be willing to provide public goods? An alternative is public provision (financed by taxpayers)
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8 Public provision How much of a public good should the government provide? Compare marginal social benefits The marginal benefit (willingness to pay) for society …with marginal social costs The opportunity costs of producing each unit
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9 Efficient provision Marginal Social Benefit Marginal Social Cost $ $ Quantity Q Eff P Eff
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10 Public provision How can the government determine marginal social cost and marginal social benefit of a public good? Cost-benefit analysis: Cost: Calculate price of production Benefit: Contingent valuation
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11 Market demand – private goods Fig 5.19 + + = = 0 1 2 3 4 5 6 0 1 2 3 4 5 Price Quantity Pete’s Demand Curve 0 1 2 3 4 5 6 0 1 2 3 4 5 Price Quantity Ann’s Demand Curve 0 1 2 3 4 5 6 0 1 2 3 4 5 6 7 8 9 10 Price Quantity Market Demand Curve Horizontally  add individual demand curves
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12 Market demand – public goods Fig 5.19 + + = = 0 1 2 3 4 5 6 0 1 2 3 4 5 Price Quantity Pete’s Demand Curve 0 1 2 3 4 5 6 0 1 2 3 4 5 Price Quantity Ann’s Demand Curve 0 1 2 3 4 5 6 7 8 9 10 11 12 0 1 2 3 4 5 Price Quantity Market Demand Curve Vertically  add individual demand curves
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13 Common resources Common resources are: Rivalrous
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