Module 4: Market Failures: Public Goods and Externalities
positive externality
a benefit that is enjoyed by a third-party as a result of an economic transaction
allocative efficiency
correct quantity of output is produced relative to other goods and services; output is found where MB=MC occurs when the triangle representing total surplus is at its maximum size
productivity efficiency
product costs of each level of output are minimized
quasi public goods
public goods and services that could be produced and delivered in such a way that exclusion would be possible
efficiency losses
reductions of combined consumer and producer surplus associated with underproduction or overproduction of a product
excludability
sellers can keep people who do not pay for a product from obtaining its benefits
specific taxes
government to levy taxes or charges specifically on the relate good; tax raises the marginal cost of producing
negative externality
harmful side effect that affects an uninvolved third party
According to the marginal-cost-marginal-benefit rule:
the optimal project size is the one for which MB = MC
government has three options for correcting the under-allocation of resources:
1) subsidies to buyers: coupon would reduce the "price" to the buyer 2) subsidies to producers: subsidies are payments from the government that decrease producersʼ costs 3) government provision: where positive externalities are extremely large, the government may decide to provide the product for free to everyone
public goods
Goods that are neither excludable nor rival in consumption
private goods
a good service that is individually consumed and that can be profitably provided by privately owned firms because they can exclude nonpayers from receiving the benefits
consumer surplus
benefit surplus received by a consumer(s) in a market; difference between the maximum price a consumer is willing to pay for a product and the actual price
deadweight loss
brown triangle representing an efficiency loss to buyers and sellers
Cost-benefit analysis attempts to:
compare the benefits and costs associated with any economic project or activity.
market failures in competitive markets
demand-side and supply-side
demand-side market failures
demand-side market failures happen when demand curves do not reflect consumers full willingness to pay for a good or service
producer surplus
difference between the actual price a producer receives (or producers receive) and the minimum acceptable price
government intervention
direct way to reduce negative externalities from a certain activity is to pass legislation limiting the activity. direct controls raise the marginal cost of production
cost benefit analysis
involves a comparison of marginal costs and marginal benefits
maximum willingness to pay
minimum acceptable price
optimal reduction of an externality
occurs when society's marginal cost and marginal benefit of reducing that externality are equal
free rider problem
once a producer has provided a public good, everyone, including nonpayers, can obtain the benefit they reduce demand
nonrivalry
one personʼs consumption of a good does not preclude consumption of the good by others
supply-side market failures
supply-side market failures occur when supply curves do not reflect the full cost of producing a good or service
A positive externality or spillover benefit occurs when:
the benefits associated with a product exceed those accruing to people who consume it.
A negative externality or spillover cost occurs when:
the total cost of producing a good exceeds the costs borne by the producer.
nonexcludability
there is no effective way of excluding individuals from the benefit of the good once it comes into existence
government failure
when economically inefficient outcomes are caused by shortcomings in the public sector
rivalry
when one person buys and consumes a product, it is not available for another person to buy and consume
externality
when some of the cost or the benefits of a good or service are passed onto or "spill over to" someone other than the immediate buyer or seller.