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Topic 15: The Role of Government 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

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University of Toronto St. George
James Pesando

Topic 15The Role of Government thJan 24 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 Overview Role of Government in a market economyImprove Efficiency if Market Failure Monopoly Natural Monopoly where there is no point for a lot of firms present in the marketExternalitiesPublic GoodsAlter Distribution of Income TaxTransfer programs Public and Private Goods 1 Two Characteristics of GoodsExcludability a person can be excluded from using the goodsRivalness one persons use of good diminishes other peoples use 2 Pure Private Goods Excludable and Rivaleg ice cream sundae Pure Public GoodsNonexcludable and Nonrivaleg national defensecriminal justice systemkey result private market cannot produce public goodsbecause market failurefree rider problems Example Lighthouselight house is a public good nonexcludablenonrivalSupposeValue to each ship owner 5000Number of ship owners 2000Total value 10M Cost 1MTotal ValueCostefficient to build
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