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Lecture 26

Lecture 26-The Role of Government

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Department
Economics
Course
ECO102H1
Professor
Jack Carr
Semester
Winter

Description
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 www.notesolution.com 1. Private Market 1) Entrepreneur requires $500 ($1 million/2,000) 2) Yet no owner will pay, since cannot be excluded from benefit of lighthouse, once built FREE RIDER PROBLEM 2. Government 1) Builds lighthouse, charges $500 to each owner 2) Each owner enjoys surplus of $4,500 ($5,000 - $500) MB of Public Good: Vertical Sum of Individual MB Schedules www.notesolution.com Efficient Production of Public Good At qMC => Increase quantity of public good At q>q*, MB reduce quantity of public good At q=q, MC=MC Ù efficient level of production Police Officers Public Good? Answer: YES Non-Excludable Non-Rival 3UREOHP/DVW hire 1st Officer 2nd Officer: MB < (or equal to) $25, 000 MC -= $50, 000 => not hire 2nd Officer www.notesolution.com 7D[HVZKLFKUDLVHUHYHQXHVIRUJRYHUQPHQWFUHDWH³GHDGZHLJKW´RUZHOIDUHORVVHV Input into government policy: (1) Design of the tax system (2) ³WUDGHRII´EHWZHHQredistribution and economic efficiency Excise Tax 1. Excise tax = wedge between price paid by buyers and price received by sellers 2. $WT¶SULFHYDOXHWREX\HUV!FRVW66 !LQHIILFLHQW (Note: market shrinks, and gains from trade are not fully realized) P SS = MC T¶ DD q 66¶WW ZHGJH Loss of consumer surplus + Loss of producer surplus = deadweight loss www.notesolution.comJanuary 21, 2010 ROLEOFGOVERNMENTINAMARKETECONOMY I. ,2574;011L.L03.L1,7N09,LO:70 1) Monopoly 2) Externalities 3) Public Goods II. Alter Distribution of Income Taxtransfer programmes Public and Private Goods I. Two Characteristic of Goods Excludability: a person can be excluded form using a good Rivalness: 4305078438:8041J44L2L3L8K0849K075045O08:80 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 www.notesolution.com
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