Lecture 26-The Role of Government

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1 Aug 2010
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January 21, 2010
ROLE OF GOVERNMENT IN A MARKET ECONOMY
I. ,PSURYH(IILFLHQF\LI³0DUNHW)DLOXUH´
1) Monopoly
2) Externalities
3) Public Goods
II. Alter Distribution of Income
Tax/transfer programmes
Public and Private Goods
I. Two Characteristic of Goods
Excludability: a person can be excluded form using a good
Rivalness: RQHSHUVRQ¶VXVHRIJRRGGLPLQLVKHVRWKHUSHRSOH¶VXVH
II. Pure Private Goods: (1) excludable
(2) rival
Example: Ice cream sundae
Pure Public Goods: (1) non-excludable
(2) non-rival
Example: National defense
Criminal Justice System
Key Result: private market cannot produce public goods
LIGHTHOUSE:
Public Good: (1) non-excludable (2) non-rival
Value to each ship owner: $5,000
Number of ship owners: $2,000
Total Value: $10 million
Cost: $1 million
Total Value > Cost => efficient to build
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Document Summary

Role of government in a market economy: 2574;011. 03. 1,709,:70. January 21, 2010: monopoly, externalities, public goods. Excludability: a person can be excluded form using a good. Example: ice cream sundae (1) non-excludable (2) non-rival. Key result: private market cannot produce public goods. Total value > cost => efficient to build. million (2) non-rival www. notesolution. com: private market, entrepreneur requires ( million/2,000, yet no owner will pay, since cannot be excluded from benefit of lighthouse, once built. Free rider problem: government, builds lighthouse, charges to each owner, each owner enjoys surplus of ,500 (,000 - ) At qmc => increase quantity of public good. At q>q*, mb reduce quantity of public good. If a town hires no police officers, the social cost of crime is , 000 per year. If the town hires four police officers (at a salary of , 000 per year for each officer), there will be no crime.

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