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Chapter 11

Chapter 11.docx

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Department
Economics
Course Code
ECO1102
Professor
David Gray

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Chapter 11- Public and Common Resources Public goods- definitions: - The difference between public goods and private goods lies mostly on the D side as opposed to the S side - The best way to think of them is in contrast to private goods Market failure: - any situation in which unregulated markets fail to bring about a socially desirable outcome. o Competitive markets usually yield desirable outcomes.  efficiency, whereby the output level is such that MB = MC - market failure CAN justify government intervention - So far we have studied private goods, which have two features (Figure 11.1) o rivalry in consumption: One person’s consumption infringes upon somebody else’s consumption of the good  Danny Sternglass and my Reese’s peanut butter cup (once he stole it from me and ate it, I no longer had any use for it) o excludability in consumption: possible to prevent someone from consuming it  He/she who pays for it uses it, and he/she who does not pay for it does not have a right  I do not live in Rockcliff Park because I cannot pay - “Left wing” people tend to think that markets usually fail, while “right wing” people believe the opposite o That is a highly generalised classification - 4 basic types treated in textbook o public goods (chapter 11) o Externalities (chapter 10) o monopoly (chapter 15 ) o inequality (chapter 20) [ will not do this term] - Public goods are characterised by non-rivalry in consumption o society consumes public goods JOINTLY  beautiful view  clean environment  highway before saturation point is reached - Public goods also are characterised by non-excludability in consumption o we cannot exclude people from benefiting  skating on the canal (almost)  national defense  Public security - There are many goods with some public good features called mixed goods. o public transportation  exclude riders who do not pay their fares, but cannot exclude them from benefiting from the lower congestion and the provision of service to the poor, so there is not total excludability o public health - immunization  could charge for shots and thus exclude certain poor people, but all benefit from greater levels of public health, so there is not total excludability - Common resources are a third type of good, being rivalrous but non excludable o They are thus not exactly the same thing as public goods o Like fish in the ocean o Source of enormous economic and political conflict Free rider problem: - Free rider problem causes market failure. It causes public goods to be under-produced by the private sector. - In this respect, it is like goods that have a positive externality o That is covered in chapter 10 - Public goods are NOT free goods – they are still economic goods o they have an opportunity cost  “Get more $ to fund universities from higher taxes on the rich” is an illustration of ‘free good’ type thinking - With private goods, we can measure people’s preferences according to their buying habits. o The price that they are observed to pay is a good indicator of their true preferences. o in other words, they have to put their $ where their mouth is if they want to consume - Free riding is lying - not contributing according to one’s true preferences. In most cases, people cannot be excluded from consuming, so they tend to underpay for public serv
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