Lecture 35-Review

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1 Aug 2010
School
Department
Course
Professor
Thursday, March 4th, 2010.
Review
Applications
1. ³0DUNHW)DLOXU5HYLVLWHG
1) Pure Public Goods
± Non-Excludable
± Non-Rival
2) Externalities
Caveat: Coase Theorem
Public Good
1. Is good excludable?
Is good rival in consumption?
2. No (to both) => public good
Example: street lighting
(ie. FDQ¶WVWRSDSHGHVWULDQIURPEHQHILWLQJIURPLWHYHQLIKH/she did
not contribute to this good, and WKHUH¶VQRrivalry/competition)
3. Private markets will not produce public goods.
:K\"³)UHHULGHSUREOHP
4. How much of public good should be produced (for allocative efficiency)?
Sum of marginal benefit to individuals = marginal cost
Externalities
Social cost private cost (production externality)
or
Private value social value (consumption externality)
Ö Market outcome is not efficient ³PDUNHWIDLOXU
SS (private cost)
DD (private value)
Qc
Pc
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