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ECO100 - JAN 21

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James Pesando

● OFFICE HOURS: THURSDAYS FROM 1 - 3 PM GE351 The Role Of Government 1. Overview ● “Market Failures” ● We don’t get the outcome that we want. ● 1) Monopoly: not allocatively efficient ○ Government needs to to regulate monopoly ○ Natural Monopoly: Declining ATC, constant MC curve, as Output Expands, ○ Regulate so that P = ATC, ● 2) Externalities ○ Deodorant: positive consumption externality ○ Negative production externality: the price will be too low and the output too high ○ When cost/benefits are external to the market ● Public Goods - things that individuals will never buy there own. 2. Public and Private Goods ● Characteristics of goods: ○ 1. Excludability: a person can be excluded from using a good ○ 2. Rivalness: one person’s use of a good diminishes with other people’s use ● Pure Private Good: excludable, rival (ice-cream sundae) ● Pure Public Good: Non-excludable, Non-rival (fireworks, national defense) ● Key result: private market cannot produce public goods 3. The Provision of Public Goods Lighthouse Example ● Non-excludable and non-rival Value to Each Ship Owner $5,000 # of Ship Owners 2,000 Total Value (Total Benefit) $10 Million Total Cost $1 Million ● Should the lighthouse be built? ○ Yes, Total Value > Total Cost => Efficient to build ● Marginal benefit versus cost to the town ● Private Market: ○ An entrepreneur requires $500 from each owner to build ○ Yet no owner will pay since he cannot be excluded from the benefit of the lighthouse once it is built ○ Private market fails because of the free rider problem. ● Government Intervention ○ Government has the power to get beyond the non-excludability of the public good. ○ The government requires $500 from each owner to build ○ The government can force each owner to pay using taxes. ■ tax each owner $500 => lighthouse is built ■ each owner gets a surplus of $4500 ($500 - $500) ○ There is a need for government intervention when there is a public good. ● How do we determine the allocatively efficient output of a public good? ○ Produce output where the sum of the marginal benefit to each individual = marginal cost ■ where the MB = MC for the whole “town” combined ■ Q* is the allocatively efficient quantity of lighthouses. 4. Excise Taxes and Allocative Efficiency. Taxes and Transfers - Income Inequality ● 2nd role of government: Redistribution of income ● Allocative efficiency isn’t the only kind of efficiency, looking from a social standpoint. ○ For example: perfect price discrimination ■ The quantity is allocatively efficient but the producer/consumer surplus isn’t distributed evenly. ● Altering the distribution of income ● Taking from the “rich” to give to the “poor ○ Employment Insurance Premiums pa
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