copyright 2011 the mcgraw-hill companies 20-1 public goods demand for public goods cost-benefit...
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Copyright 2011 The McGraw-Hill Companies20-1
Public GoodsDemand For Public GoodsCost-Benefit AnalysisExternalitiesGlobal WarmingInformation FailuresLast Word
Key Terms
End Show
20Government and Market Failure
Copyright 2011 The McGraw-Hill Companies20-2
Public GoodsDemand For Public GoodsCost-Benefit AnalysisExternalitiesGlobal WarmingInformation FailuresLast Word
Key Terms
End Show
Chapter Objectives• How Public Goods are
Distinguished from Private Goods
• The Method of Determining the Optimal Quantity of a Public Good
• The Basics of Cost-Benefit Analysis
• About Externalities (Spillover Costs and Benefits) and the Methods to Remedy Them
• How Information Failures Can Justify Government Interventions in Some Markets
Copyright 2011 The McGraw-Hill Companies20-3
Public GoodsDemand For Public GoodsCost-Benefit AnalysisExternalitiesGlobal WarmingInformation FailuresLast Word
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Public Goods• Private Goods
–Rivalry–Excludability
• Public Goods–Nonrivalry–Nonexcludability–Free-Rider Problem–Optimal Quantity of a Public
Good20.1
Copyright 2011 The McGraw-Hill Companies20-4
Public GoodsDemand For Public GoodsCost-Benefit AnalysisExternalitiesGlobal WarmingInformation FailuresLast Word
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Demand for Public Goods
(1)QuantityOf Public
Good
(2)Jolandi’s’
WillingnessTo Pay (Price)
(3)Ben’s
WillingnessTo Pay (Price)
(4)Collective
WillingnessTo Pay (Price)
1
2
3
4
5
R4
3
2
1
0
R5
4
3
2
1
R9
7
5
3
1
+
+
+
+
+
=
=
=
=
=
Two Individuals
Graphically…
Copyright 2011 The McGraw-Hill Companies20-5
Public GoodsDemand For Public GoodsCost-Benefit AnalysisExternalitiesGlobal WarmingInformation FailuresLast Word
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Demand for Public GoodsR9
7
5
3
10
P
Q1 2 3 4 5
R654321
0
P
Q1 2 3 4 5
R6543210
P
Q1 2 3 4 5Jolandi
Ben
Collective Demand and Supply
D1
D2
DC
S
Jolandi’s Demand
Ben’s Demand
Collective Demand
R3 for 2 Items
R4 for 2 Items
R7 for 2 Items
R1 for 4 Items
R2 for 4 Items
R3 for 4 Items
Connect the Dots
CollectiveWillingness
To Pay
OptimalQuantity
ComparingMB and MC
Copyright 2011 The McGraw-Hill Companies20-6
Public GoodsDemand For Public GoodsCost-Benefit AnalysisExternalitiesGlobal WarmingInformation FailuresLast Word
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Cost-Benefit Analysis• Concept
• Marginal-Cost-Marginal-Benefit Rule
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Public GoodsDemand For Public GoodsCost-Benefit AnalysisExternalitiesGlobal WarmingInformation FailuresLast Word
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ExternalitiesNegative Externalities Positive Externalities
0
D
S
St
Overallocation
NegativeExternalities St
Underallocation
PositiveExternalities
Qo QoQe Qe
P P
0 Q Q
• Individual Bargaining: Coase Theorem– Limitations
• Liability Rules and Lawsuits
D
Dt
20.1
20.1
20.2
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Public GoodsDemand For Public GoodsCost-Benefit AnalysisExternalitiesGlobal WarmingInformation FailuresLast Word
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Externalities• Government Intervention
–Direct Controls–Specific Taxes–Subsidies and Government
Provision• Subsidies to Buyers• Subsidies to Producers
• A Market-Based Approach–The Tragedy of the
Commons–A Market for Externality
Rights
Copyright 2011 The McGraw-Hill Companies20-9
Public GoodsDemand For Public GoodsCost-Benefit AnalysisExternalitiesGlobal WarmingInformation FailuresLast Word
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Externalities• Operation of the Market
–Advantages–Real-World Examples
D2006
D2016S=Supply of
PollutionRights
500 750 1000
R100
R200
P
0 Q
Pri
ce P
er P
ollu
tio
n R
igh
t
Quantity of 1-Ton Pollution Rights
Copyright 2011 The McGraw-Hill Companies20-10
Public GoodsDemand For Public GoodsCost-Benefit AnalysisExternalitiesGlobal WarmingInformation FailuresLast Word
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Externalities• Society’s Optimal Amount of Externality Reduction
– MC, MB, and Equilibrium
0
So
ciet
y’s
Mar
gin
al B
enef
it a
nd
Mar
gin
alC
ost
of
Po
llu
tio
n A
bat
emen
t (D
oll
ars)
Q1
MB
MC
SociallyOptimum AmountOf PollutionAbatement
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Carbon-Dioxide Emissions, Tons Per Capita, in Africa and Selected OECD Nations
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Information Failures• Asymmetric Information• Inadequate Information
Involving Sellers– Example: Gasoline Market– Example: Licensing of
Surgeons• Inadequate Information
Involving Buyers– Moral Hazard Problem– Adverse Selection Problem– Workplace Safety
• Qualification
20.3
Copyright 2011 The McGraw-Hill Companies20-13
Public GoodsDemand For Public GoodsCost-Benefit AnalysisExternalitiesGlobal WarmingInformation FailuresLast Word
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Satellite Tracking: A Case of Positive Externalities
• Some Redistribute Rather than Reduce Crime
• Sattellite tracking Car Recoveries are much higher than others
• Locates and Stops Chop Shops• Underallocation Result• Subsidize Consumer Purchase with
Lower Insurance Rates• Discounts too small to Offset Under
allocation
Last
Word
Copyright 2011 The McGraw-Hill Companies20-14
Public GoodsDemand For Public GoodsCost-Benefit AnalysisExternalitiesGlobal WarmingInformation FailuresLast Word
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Key Terms• private goods• public goods• free-rider problem• cost-benefit analysi
s• marginal-cost-margi
nal-benefit-rule• externalities• Coase theorem• tragedy of the com
mons
• market for externality rights
• optimum reduction of an externality
• asymmetric information
• moral hazard problem
• adverse selection problem
Copyright 2011 The McGraw-Hill Companies20-15
Public GoodsDemand For Public GoodsCost-Benefit AnalysisExternalitiesGlobal WarmingInformation FailuresLast Word
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Fiscal Policy, Deficits and Debt