Week 11 Lecture - ECON1001 Week 11 Public Goods and...

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Unformatted text preview: ECON1001 Week 11 Public Goods and Externalities 2 The Story So Far… Demand Supply Consumer preferences and wealth Costs Firm objectives Price and quantity Government policy Market structure • This yields an efficient outcome • unless there is market failure 3 Market Failure • Recall the sources of market failure • Government intervention • Price controls • Taxes, subsidies, and quotas • Market (monopoly) power • Public goods • Externalities 4 Public Goods and Common Resources: Topic Outline • Explain the difference between private and public goods • Discuss the provision of public goods • Other types of goods • Common resources • Natural monopoly 5 Private Goods • We have considered only private goods • Private goods share two common features • Rivalry in consumption • Consumption of the good/service by one person detracts from the enjoyment of another • Eg when you eat a pizza, there is less left for your friends. • Excludability • People can be prevented from consuming unless they pay for the good/service • Eg the store owner will not give you the pizza unless you pay for it. 6 Public Goods • Public goods are • Non-rivalrous • One person’s consumption does not detract from another’s • Eg police and defence services, bridges? • Non-excludable • People cannot be prevented from consuming the good/service 7 The Free Rider Problem • Public goods 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 8 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 9 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 10 Efficient Provision MSB (Market D) MSC (MC if no externalities) $ $ Quantity Q Eff 11 Market Demand – Private Goods Fig 5.19 + + = = 1 2 3 4 5 6 1 2 3 4 5 Price Quantity Pete’s Demand Curve 1 2 3 4 5 6 1 2 3 4 5 Price Quantity Ann’s Demand Curve 1 2 3 4 5 6 1 2 3 4 5 6 7 8 9 10 Price Quantity Market Demand Curve Horizontally add individual demand curves 12 Market Demand – Public Goods Fig 5.19 + + = = 1 2 3 4 5 6 1 2 3 4 5 Price Quantity Pete’s Demand Curve 1 2 3 4 5 6 1 2 3 4 5 Price Quantity Ann’s Demand Curve 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 Price Quantity Market Demand Curve Vertically add individual demand curves 13 Common Resources • Common resources are • Rivalrous in consumption • One person’s consumption does detract from another’s • Non-excludable • People cannot be prevented from consuming the good/service • Eg air, water, mineral resources, whaling, cattle grazing on common land 14...
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Week 11 Lecture - ECON1001 Week 11 Public Goods and...

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