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Nov 12 2013.docx

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David Gray

Chapter 11 Public Goods and Common Resources Market Failure  Any situation in which unregulated markets fail to bring about a socially desirable outcome - Competitive markets usually yield desirable outcomes.  Efficiency, whereby the output level is such that MB = MC  Market failure CAN justify government intervention  “Left wing” people tend to think that markets usually fail, while “right wing” people believe the opposite  4 basic types treated in textbook - Public goods (Chapter 1) - Externalities (Chapter 10) - Monopoly ( Chapter 15) - Inequality (Chapter 20)  Will not do this term The difference between public goods and private goods lies mostly on the D side as opposed to the S side The best way to think of them is in contrast to private goods Private Goods  So far we have studied private goods, which have two features (Figure 11.1) - Rivalry in consumption: one person’s consumption infringes upon somebody else’s consumption of the good  D.S. and my Reese’s peanut butter cup (once he stole it from e and ate it, I no longer had any use for it) - Excludability in consumption: it is possible to prevent someone from consuming it  He/ She who pays for it uses it; he/ she who does not pay for it does not have a right  I do not live in Rockcliff Park because I cannot pay Public Goods – Definition  Public goods are characterized by non-rivalry in consumption - Society consumes public goods JOINTLY  Beautiful view  Clean environment  Highway before the saturation point is reached Public goods also are characterized by Non-Excludability in consumption  - We cannot exclude people from benefiting  Skating on the canal (almost)  National defense  Public security (law and order)  We all benefit from the law crime rate  Common Resources are a third type of goods, being rivalrous but non-excludable - They are thus not quite the same thing as public goods - Best example is fish in the ocean (near international waters) - Source of enormous economic and political conflict  Public goods are NOT free goods – they are still economic goods  Free goods are those goods without the opportunity cost - They have an opportunity cost  “Get more money to fund universities from higher taxes on the rich” is an illustration of “free good” type thinking - They are financed from tax revenue  They are many goods with some public good features called mixed goods. - Public transportation  Exclude riders who do not pay their fares, but cannot exclude them from benefiting from the lower congestion and the provision of service to the poor, so there is no total excludability. - Public health – immunization  Could charge for flu shorts and thus exclude certain poor people, but all benefit from greater levels of public health, so there is not total excludability Free Rider Problem  What is the level of Demand for a public good? - There is no optimal level of Demand, because of the free rider problem  Free rider problem causes market failure. It causes public goods to be under-produced by the private sector.  In this respect, it is like goods that have a positive externality - That was covered in Chapter 10  Punch Line: There will be under-production of the private goods, because of the free rider effect.  With private goods, we can measure people’s preferences according to their buying habits. -
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