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 persons consumption does not detract from anothers 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 Petes Demand Curve 1 2 3 4 5 6 1 2 3 4 5 Price Quantity Anns 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 Petes Demand Curve 1 2 3 4 5 6 1 2 3 4 5 Price Quantity Anns 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 persons consumption does detract from anothers 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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