lecture_11 - Public goods and externalities arkets...

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ECON 1001 LECTURE 11 1 Public goods and externalities Markets maximises welfare - buyers consider their private benefits - sellers consider their costs compared the market price Public goods 1. Non-excludable 2. Non-rival Because non-excludable – have a free rider problem
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ECON 1001 LECTURE 11 2 The market for public goods The market demand curve - sum the individual demand curves vertically (note, for a private good the market demand is the horizontal summation of the individual demand curves) Intuition: Suppose 1 unit of the good is supplied. Person A has a MB = 20; Person B has a MB = 40 What is the surplus (not considering any costs) that accrues to society?
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ECON 1001 LECTURE 11 3 Example: MB 1 = 10 – q; MB 2 = 20 – 2q What is market demand curve for the public good? - sum vertically MB T = 30 – 3q
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ECON 1001 LECTURE 11 4 q MB 10 20 30 MB1 MB2 MBT Market demand curve for public goods - vertically sum individual demand curves
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ECON 1001 LECTURE 11 5 What is the efficient quantity of the good to be supplied if MC = $15 per unit? MC = $21 per unit?
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ECON 1001 LECTURE 11 6 Provision of public goods by governments 1. Cost benefit analysis 2. Contingent valuations – estimation of the willingness to pay for a project on the part of consumers who may benefit 3. Discounted future benefits Common resources - resources that are non-excludable by rivalrous - Tragedy of the Commons
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ECON 1001 LECTURE 11 7 Externalities There are benefits or costs to parties that are not participants in the market? Externality - a benefit or cost of a good or service to a third party Negative externality - a adverse effect of a good on the 3rd party Positive externality - a positive effect of the good on the 3rd party
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ECON 1001 LECTURE 11 8 In each case, there is an external effect on a party that is not considered by the decision makers (and is not captured in the market). Economic wellbeing includes bystanders as well as buyers and sellers in the market For example - the company doing the R+D does not capture all the benefits of its research Likewise - company polluting the river does not consider the cost the people fishing downstream Market equilibrium does not maximise surplus Government intervention may be able to increase total welfare
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ECON 1001 LECTURE 11 9 P q Supply (private cost) Demand (private benefit) P M q m Market outcome - no externality CS PS
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ECON 1001 LECTURE 11 10 Negative prodn. externality - a cost to a party not in the market (for example, people who breath in pollution) - social cost of each unit of output includes the private cost and the external cost - taking account of the externality, the cost to society of production is greater than the cost to the firm - the difference between the social cost curve and the private cost curve represents the external cost of the marginal unit of production Think about what a social planner would do - to maximise surplus, consider value to consumers and social cost of production.
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ECON 1001 LECTURE 11 11 The social planner chooses production where social cost intersects
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This note was uploaded on 11/06/2011 for the course ECMT 1010 taught by Professor Vadimtimovsky during the Three '10 term at University of Sydney.

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lecture_11 - Public goods and externalities arkets...

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