ECO101H1 Lecture Notes - Marginal Cost, Fixed Cost, Marginal Utility

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2 Jul 2011
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Topic 15 t The Role of Government
(Jan 24th)
Outline:
1. Overview;
2. Public and Private Goods;
3. Example: Lighthouse;
4. Excise Taxes and Allocative Efficiency;
5. Regulating a natural monopoly
6. Distribution of Income
z Overview
Role of Government in a market economy
-- Improve Efficiency ](^Dl Failure_;
-- Monopoly (Natural Monopoly)
t where there is no point for a lot of firms present in the market;
-- Externalities;
-- Public Goods;
-- Alter Distribution of Income;
-- Tax/Transfer programs;
z Public and Private Goods;
1. Two Characteristics of Goods
-- Excludability: a person can be excluded from using the goods;
-- Rivalness: one person[s use of good diminishes other people[s use;
2. Pure Private Goods
-- Excludable and Rival;
-- e.g. ice cream sundae;
Pure Public Goods:
-- Non-excludable and Non-rival;
-- e.g. national defense;
criminal justice system
key result: private market cannot produce public goods;
(because market failure & free rider problems)
z Example: Lighthouse
-- light house is a public good: non-excludable & non-rival;
-- Suppose: - Value to each ship owner: $5,000;
- Number of ship owners: 2,000;
- Total value: $10M;
- Cost: $1M
Total Value > Cost Î efficient to build;
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