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30 - 1 Copyright McGraw-Hill/Irwin, 2005 Public Goods Demand for a Pub lic Good Optimal Amount o f a Public Good Cost-Benefit Ana lysis Spillover Costs and Benefits Market-Based App roach to Spillov er Rights Society’s Optima l Amount of Exte rnality Reductio n Recycling Key Terms Previo us Slide Next Slid e End End Show Show Government And Market Failure 30 C H A P T E R

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Page 1: 30 - 1 Copyright McGraw-Hill/Irwin, 2005 Public Goods Demand for a Public Good Optimal Amount of a Public Good Cost-Benefit Analysis Spillover Costs and

30 - 1Copyright McGraw-Hill/Irwin, 2005

Public Goods

Demand for a Public Good

Optimal Amount of a Public Good

Cost-Benefit Analysis

Spillover Costs and Benefits

Market-Based Approach to Spillover Rights

Society’s Optimal Amount of Externality Reduction

Recycling

Key Terms

PreviousSlide

NextSlide

EndEndShowShow

GovernmentAnd

Market Failure

30C H A P T E R

Page 2: 30 - 1 Copyright McGraw-Hill/Irwin, 2005 Public Goods Demand for a Public Good Optimal Amount of a Public Good Cost-Benefit Analysis Spillover Costs and

30 - 2Copyright McGraw-Hill/Irwin, 2005

Public Goods

Demand for a Public Good

Optimal Amount of a Public Good

Cost-Benefit Analysis

Spillover Costs and Benefits

Market-Based Approach to Spillover Rights

Society’s Optimal Amount of Externality Reduction

Recycling

Key Terms

PreviousSlide

NextSlide

EndEndShowShow

Rivalry & Excludability(Chapter 5)

Private GoodsDivisibility

Demand Curve is Horizontal Summation

Public Goods

Indivisibility

PUBLIC GOODS

Page 3: 30 - 1 Copyright McGraw-Hill/Irwin, 2005 Public Goods Demand for a Public Good Optimal Amount of a Public Good Cost-Benefit Analysis Spillover Costs and

30 - 3Copyright McGraw-Hill/Irwin, 2005

Public Goods

Demand for a Public Good

Optimal Amount of a Public Good

Cost-Benefit Analysis

Spillover Costs and Benefits

Market-Based Approach to Spillover Rights

Society’s Optimal Amount of Externality Reduction

Recycling

Key Terms

PreviousSlide

NextSlide

EndEndShowShow

Problems of Revealing Preferences

Quantity

Adams’Willingness

to pay (price)

Benson’sWillingness

to pay (price)

CollectiveWillingness

to pay (price)

1

DEMAND FOR A PUBLIC GOOD

Exclusion Principledoes not apply

Page 4: 30 - 1 Copyright McGraw-Hill/Irwin, 2005 Public Goods Demand for a Public Good Optimal Amount of a Public Good Cost-Benefit Analysis Spillover Costs and

30 - 4Copyright McGraw-Hill/Irwin, 2005

Public Goods

Demand for a Public Good

Optimal Amount of a Public Good

Cost-Benefit Analysis

Spillover Costs and Benefits

Market-Based Approach to Spillover Rights

Society’s Optimal Amount of Externality Reduction

Recycling

Key Terms

PreviousSlide

NextSlide

EndEndShowShow

Problems of Revealing Preferences

Quantity

Adams’Willingness

to pay (price)

Benson’sWillingness

to pay (price)

CollectiveWillingness

to pay (price)

1 $4 $5 $9+ =

DEMAND FOR A PUBLIC GOOD

Page 5: 30 - 1 Copyright McGraw-Hill/Irwin, 2005 Public Goods Demand for a Public Good Optimal Amount of a Public Good Cost-Benefit Analysis Spillover Costs and

30 - 5Copyright McGraw-Hill/Irwin, 2005

Public Goods

Demand for a Public Good

Optimal Amount of a Public Good

Cost-Benefit Analysis

Spillover Costs and Benefits

Market-Based Approach to Spillover Rights

Society’s Optimal Amount of Externality Reduction

Recycling

Key Terms

PreviousSlide

NextSlide

EndEndShowShow

Problems of Revealing Preferences

Quantity

Adams’Willingness

to pay (price)

Benson’sWillingness

to pay (price)

CollectiveWillingness

to pay (price)

12

$4 3

$5 4

$9 7

++

==

DEMAND FOR A PUBLIC GOOD

Page 6: 30 - 1 Copyright McGraw-Hill/Irwin, 2005 Public Goods Demand for a Public Good Optimal Amount of a Public Good Cost-Benefit Analysis Spillover Costs and

30 - 6Copyright McGraw-Hill/Irwin, 2005

Public Goods

Demand for a Public Good

Optimal Amount of a Public Good

Cost-Benefit Analysis

Spillover Costs and Benefits

Market-Based Approach to Spillover Rights

Society’s Optimal Amount of Externality Reduction

Recycling

Key Terms

PreviousSlide

NextSlide

EndEndShowShow

Problems of Revealing Preferences

Quantity

Adams’Willingness

to pay (price)

Benson’sWillingness

to pay (price)

CollectiveWillingness

to pay (price)

123

$4 3 2

$5 4 3

$9 7 5

+++

===

DEMAND FOR A PUBLIC GOOD

Page 7: 30 - 1 Copyright McGraw-Hill/Irwin, 2005 Public Goods Demand for a Public Good Optimal Amount of a Public Good Cost-Benefit Analysis Spillover Costs and

30 - 7Copyright McGraw-Hill/Irwin, 2005

Public Goods

Demand for a Public Good

Optimal Amount of a Public Good

Cost-Benefit Analysis

Spillover Costs and Benefits

Market-Based Approach to Spillover Rights

Society’s Optimal Amount of Externality Reduction

Recycling

Key Terms

PreviousSlide

NextSlide

EndEndShowShow

Problems of Revealing Preferences

Quantity

Adams’Willingness

to pay (price)

Benson’sWillingness

to pay (price)

CollectiveWillingness

to pay (price)

1234

$4 3 2 1

$5 4 3 2

$9 7 5 3

++++

====

DEMAND FOR A PUBLIC GOOD

Page 8: 30 - 1 Copyright McGraw-Hill/Irwin, 2005 Public Goods Demand for a Public Good Optimal Amount of a Public Good Cost-Benefit Analysis Spillover Costs and

30 - 8Copyright McGraw-Hill/Irwin, 2005

Public Goods

Demand for a Public Good

Optimal Amount of a Public Good

Cost-Benefit Analysis

Spillover Costs and Benefits

Market-Based Approach to Spillover Rights

Society’s Optimal Amount of Externality Reduction

Recycling

Key Terms

PreviousSlide

NextSlide

EndEndShowShow

Problems of Revealing Preferences

Quantity

Adams’Willingness

to pay (price)

Benson’sWillingness

to pay (price)

CollectiveWillingness

to pay (price)

12345

$4 3 2 1 0

$5 4 3 2 1

$9 7 5 3 1

+++++

=====

DEMAND FOR A PUBLIC GOOD

Page 9: 30 - 1 Copyright McGraw-Hill/Irwin, 2005 Public Goods Demand for a Public Good Optimal Amount of a Public Good Cost-Benefit Analysis Spillover Costs and

30 - 9Copyright McGraw-Hill/Irwin, 2005

Public Goods

Demand for a Public Good

Optimal Amount of a Public Good

Cost-Benefit Analysis

Spillover Costs and Benefits

Market-Based Approach to Spillover Rights

Society’s Optimal Amount of Externality Reduction

Recycling

Key Terms

PreviousSlide

NextSlide

EndEndShowShow

P

Q

$ 9 7

5

3

1

0 1 2 3 4 5

OPTIMAL AMOUNT OF A PUBLIC GOOD

Adams’ willingness

to pay

D1

Page 10: 30 - 1 Copyright McGraw-Hill/Irwin, 2005 Public Goods Demand for a Public Good Optimal Amount of a Public Good Cost-Benefit Analysis Spillover Costs and

30 - 10Copyright McGraw-Hill/Irwin, 2005

Public Goods

Demand for a Public Good

Optimal Amount of a Public Good

Cost-Benefit Analysis

Spillover Costs and Benefits

Market-Based Approach to Spillover Rights

Society’s Optimal Amount of Externality Reduction

Recycling

Key Terms

PreviousSlide

NextSlide

EndEndShowShow

P

Q

$ 9 7

5

3

1

0 1 2 3 4 5

OPTIMAL AMOUNT OF A PUBLIC GOOD

Benson’swillingness

to pay

D2

D1

Page 11: 30 - 1 Copyright McGraw-Hill/Irwin, 2005 Public Goods Demand for a Public Good Optimal Amount of a Public Good Cost-Benefit Analysis Spillover Costs and

30 - 11Copyright McGraw-Hill/Irwin, 2005

Public Goods

Demand for a Public Good

Optimal Amount of a Public Good

Cost-Benefit Analysis

Spillover Costs and Benefits

Market-Based Approach to Spillover Rights

Society’s Optimal Amount of Externality Reduction

Recycling

Key Terms

PreviousSlide

NextSlide

EndEndShowShow

P

Q

$ 9 7

5

3

1

0 1 2 3 4 5

DC

OPTIMAL AMOUNT OF A PUBLIC GOOD

When verticallyadded equals

collectivewillingness

to pay

D2

D1

Page 12: 30 - 1 Copyright McGraw-Hill/Irwin, 2005 Public Goods Demand for a Public Good Optimal Amount of a Public Good Cost-Benefit Analysis Spillover Costs and

30 - 12Copyright McGraw-Hill/Irwin, 2005

Public Goods

Demand for a Public Good

Optimal Amount of a Public Good

Cost-Benefit Analysis

Spillover Costs and Benefits

Market-Based Approach to Spillover Rights

Society’s Optimal Amount of Externality Reduction

Recycling

Key Terms

PreviousSlide

NextSlide

EndEndShowShow

P

Q

$ 9 7

5

3

1

0 1 2 3 4 5

The public good’smarginal costas shown by S

DC

S

OPTIMAL AMOUNT OF A PUBLIC GOOD

Page 13: 30 - 1 Copyright McGraw-Hill/Irwin, 2005 Public Goods Demand for a Public Good Optimal Amount of a Public Good Cost-Benefit Analysis Spillover Costs and

30 - 13Copyright McGraw-Hill/Irwin, 2005

Public Goods

Demand for a Public Good

Optimal Amount of a Public Good

Cost-Benefit Analysis

Spillover Costs and Benefits

Market-Based Approach to Spillover Rights

Society’s Optimal Amount of Externality Reduction

Recycling

Key Terms

PreviousSlide

NextSlide

EndEndShowShow

P

Q

$ 9 7

5

3

1

0 1 2 3 4 5

DC

S

OPTIMAL AMOUNT OF A PUBLIC GOOD

Yields theoptimum amount

of the public good

MB = MC

Page 14: 30 - 1 Copyright McGraw-Hill/Irwin, 2005 Public Goods Demand for a Public Good Optimal Amount of a Public Good Cost-Benefit Analysis Spillover Costs and

30 - 14Copyright McGraw-Hill/Irwin, 2005

Public Goods

Demand for a Public Good

Optimal Amount of a Public Good

Cost-Benefit Analysis

Spillover Costs and Benefits

Market-Based Approach to Spillover Rights

Society’s Optimal Amount of Externality Reduction

Recycling

Key Terms

PreviousSlide

NextSlide

EndEndShowShow

COST-BENEFIT ANALYSIS

Marginal Cost = Marginal Benefit Rule

Spillover CostsOverallocation

Spillover BenefitsUnderallocation

Externalities

Page 15: 30 - 1 Copyright McGraw-Hill/Irwin, 2005 Public Goods Demand for a Public Good Optimal Amount of a Public Good Cost-Benefit Analysis Spillover Costs and

30 - 15Copyright McGraw-Hill/Irwin, 2005

Public Goods

Demand for a Public Good

Optimal Amount of a Public Good

Cost-Benefit Analysis

Spillover Costs and Benefits

Market-Based Approach to Spillover Rights

Society’s Optimal Amount of Externality Reduction

Recycling

Key Terms

PreviousSlide

NextSlide

EndEndShowShow

P

Q

SPILLOVER COSTS AND BENEFITS

D

0

Spillovercosts

St

S

Overallocation

Q0 Qe

Page 16: 30 - 1 Copyright McGraw-Hill/Irwin, 2005 Public Goods Demand for a Public Good Optimal Amount of a Public Good Cost-Benefit Analysis Spillover Costs and

30 - 16Copyright McGraw-Hill/Irwin, 2005

Public Goods

Demand for a Public Good

Optimal Amount of a Public Good

Cost-Benefit Analysis

Spillover Costs and Benefits

Market-Based Approach to Spillover Rights

Society’s Optimal Amount of Externality Reduction

Recycling

Key Terms

PreviousSlide

NextSlide

EndEndShowShow

P

Q

SPILLOVER COSTS AND BENEFITS

0 Qe Q0

D

Dt

SpilloverBenefits

St

Underallocation

Page 17: 30 - 1 Copyright McGraw-Hill/Irwin, 2005 Public Goods Demand for a Public Good Optimal Amount of a Public Good Cost-Benefit Analysis Spillover Costs and

30 - 17Copyright McGraw-Hill/Irwin, 2005

Public Goods

Demand for a Public Good

Optimal Amount of a Public Good

Cost-Benefit Analysis

Spillover Costs and Benefits

Market-Based Approach to Spillover Rights

Society’s Optimal Amount of Externality Reduction

Recycling

Key Terms

PreviousSlide

NextSlide

EndEndShowShow

Liability Rules andLawsuits

Government InterventionDirect ControlsSpecific Taxes

Individual Bargaining –Coase Theorem

SPILLOVER COSTS AND BENEFITS

Subsidies and Government Provision

Page 18: 30 - 1 Copyright McGraw-Hill/Irwin, 2005 Public Goods Demand for a Public Good Optimal Amount of a Public Good Cost-Benefit Analysis Spillover Costs and

30 - 18Copyright McGraw-Hill/Irwin, 2005

Public Goods

Demand for a Public Good

Optimal Amount of a Public Good

Cost-Benefit Analysis

Spillover Costs and Benefits

Market-Based Approach to Spillover Rights

Society’s Optimal Amount of Externality Reduction

Recycling

Key Terms

PreviousSlide

NextSlide

EndEndShowShow

P

Q

CORRECTING SPILLOVER COSTS

D

0

Spillovercosts

St

S

TAX

OverallocationCorrected

Q0 Qe

Page 19: 30 - 1 Copyright McGraw-Hill/Irwin, 2005 Public Goods Demand for a Public Good Optimal Amount of a Public Good Cost-Benefit Analysis Spillover Costs and

30 - 19Copyright McGraw-Hill/Irwin, 2005

Public Goods

Demand for a Public Good

Optimal Amount of a Public Good

Cost-Benefit Analysis

Spillover Costs and Benefits

Market-Based Approach to Spillover Rights

Society’s Optimal Amount of Externality Reduction

Recycling

Key Terms

PreviousSlide

NextSlide

EndEndShowShow

P

Q

CORRECTING SPILLOVER BENFITS

0 Q0Qe

D

S

Dt

SpilloverBenefits

Underallocation

Page 20: 30 - 1 Copyright McGraw-Hill/Irwin, 2005 Public Goods Demand for a Public Good Optimal Amount of a Public Good Cost-Benefit Analysis Spillover Costs and

30 - 20Copyright McGraw-Hill/Irwin, 2005

Public Goods

Demand for a Public Good

Optimal Amount of a Public Good

Cost-Benefit Analysis

Spillover Costs and Benefits

Market-Based Approach to Spillover Rights

Society’s Optimal Amount of Externality Reduction

Recycling

Key Terms

PreviousSlide

NextSlide

EndEndShowShow

P

Q

CORRECTING SPILLOVER BENFITS

0 Q0Qe

D

S

Dt

Subsidy toconsumerincreasesdemand

UnderallocationCorrected

Correcting by Subsidy to Consumers

Page 21: 30 - 1 Copyright McGraw-Hill/Irwin, 2005 Public Goods Demand for a Public Good Optimal Amount of a Public Good Cost-Benefit Analysis Spillover Costs and

30 - 21Copyright McGraw-Hill/Irwin, 2005

Public Goods

Demand for a Public Good

Optimal Amount of a Public Good

Cost-Benefit Analysis

Spillover Costs and Benefits

Market-Based Approach to Spillover Rights

Society’s Optimal Amount of Externality Reduction

Recycling

Key Terms

PreviousSlide

NextSlide

EndEndShowShow

P

Q

D

0

Subsidy toproducersincreases

supply

St

S’t

UnderallocationCorrected

Qe Q0

Correcting by Subsidy to ProducersCORRECTING SPILLOVER BENFITS

Page 22: 30 - 1 Copyright McGraw-Hill/Irwin, 2005 Public Goods Demand for a Public Good Optimal Amount of a Public Good Cost-Benefit Analysis Spillover Costs and

30 - 22Copyright McGraw-Hill/Irwin, 2005

Public Goods

Demand for a Public Good

Optimal Amount of a Public Good

Cost-Benefit Analysis

Spillover Costs and Benefits

Market-Based Approach to Spillover Rights

Society’s Optimal Amount of Externality Reduction

Recycling

Key Terms

PreviousSlide

NextSlide

EndEndShowShow

A MARKET-BASED APPROACHTO SPILLOVER COSTS

The Tragedy of the CommonsA Market for Externality Rights

•Operation of the Market•Advantages

S = Supply of pollution rights

D 2012

Pric

e pe

r pol

lutio

n rig

ht

Quantity of pollution rights500 750 1000

$200

$100

D 2004

Page 23: 30 - 1 Copyright McGraw-Hill/Irwin, 2005 Public Goods Demand for a Public Good Optimal Amount of a Public Good Cost-Benefit Analysis Spillover Costs and

30 - 23Copyright McGraw-Hill/Irwin, 2005

Public Goods

Demand for a Public Good

Optimal Amount of a Public Good

Cost-Benefit Analysis

Spillover Costs and Benefits

Market-Based Approach to Spillover Rights

Society’s Optimal Amount of Externality Reduction

Recycling

Key Terms

PreviousSlide

NextSlide

EndEndShowShow

SOCIETY’S OPTIMAL AMOUNTOF EXTERNALITY REDUCTION

Application of MC = MB Rule

MC, MB Equilibrium Optimal Reduction of an

ExternalityShifts in the Curves

Graphically…

Page 24: 30 - 1 Copyright McGraw-Hill/Irwin, 2005 Public Goods Demand for a Public Good Optimal Amount of a Public Good Cost-Benefit Analysis Spillover Costs and

30 - 24Copyright McGraw-Hill/Irwin, 2005

Public Goods

Demand for a Public Good

Optimal Amount of a Public Good

Cost-Benefit Analysis

Spillover Costs and Benefits

Market-Based Approach to Spillover Rights

Society’s Optimal Amount of Externality Reduction

Recycling

Key Terms

PreviousSlide

NextSlide

EndEndShowShow

SOCIETY’S OPTIMAL AMOUNTOF EXTERNALITY REDUCTION

MC

MB

Socially optimumamount ofpollution

abatement

0

So

ciet

y’s

mar

gin

al b

enef

it a

nd

mar

gin

alco

st o

f p

oll

uti

on

ab

atem

ent

Amount of pollution abatement

Q1

Page 25: 30 - 1 Copyright McGraw-Hill/Irwin, 2005 Public Goods Demand for a Public Good Optimal Amount of a Public Good Cost-Benefit Analysis Spillover Costs and

30 - 25Copyright McGraw-Hill/Irwin, 2005

Public Goods

Demand for a Public Good

Optimal Amount of a Public Good

Cost-Benefit Analysis

Spillover Costs and Benefits

Market-Based Approach to Spillover Rights

Society’s Optimal Amount of Externality Reduction

Recycling

Key Terms

PreviousSlide

NextSlide

EndEndShowShow

Market for Recyclable Inputs

Policy•Demand Incentives•Supply Incentives

Global Warming Theory

RECYCLING

Page 26: 30 - 1 Copyright McGraw-Hill/Irwin, 2005 Public Goods Demand for a Public Good Optimal Amount of a Public Good Cost-Benefit Analysis Spillover Costs and

30 - 26Copyright McGraw-Hill/Irwin, 2005

Public Goods

Demand for a Public Good

Optimal Amount of a Public Good

Cost-Benefit Analysis

Spillover Costs and Benefits

Market-Based Approach to Spillover Rights

Society’s Optimal Amount of Externality Reduction

Recycling

Key Terms

PreviousSlide

NextSlide

EndEndShowShow

Information Failures

Inadequate information …about sellersabout buyers

Moral Hazard Problem Adverse Selection Problem

•Workplace Safety

Asymmetric Information

RECYCLING

Page 27: 30 - 1 Copyright McGraw-Hill/Irwin, 2005 Public Goods Demand for a Public Good Optimal Amount of a Public Good Cost-Benefit Analysis Spillover Costs and

cost-benefit analysismarginal-cost – marginal-benefit ruleexternalitiesCoase theoremtragedy of the commonsmarket for externality rightsoptimal reduction of an externalityasymmetric informationmoral hazard problemadverse selection problem

ENDBACKCopyright McGraw-Hill/Irwin, 2005

Page 28: 30 - 1 Copyright McGraw-Hill/Irwin, 2005 Public Goods Demand for a Public Good Optimal Amount of a Public Good Cost-Benefit Analysis Spillover Costs and

30 - 28Copyright McGraw-Hill/Irwin, 2005

Public Goods

Demand for a Public Good

Optimal Amount of a Public Good

Cost-Benefit Analysis

Spillover Costs and Benefits

Market-Based Approach to Spillover Rights

Society’s Optimal Amount of Externality Reduction

Recycling

Key Terms

PreviousSlide

NextSlide

EndEndShowShow

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