Economics Chapter 4: Market Failures: Public Goods and Externalities

efficiency loss

reductions of combined consumer and producer surplus associated with underproduction or overproduction of a product

gov fixes positive externalities-spillover benefits

subsidies on consumers and producers government provision

negative externalities

They are the "bad" effects that are suffered by a third party when a good or service is produced or consumed; causes of supply-side market failures

marginal cost= marginal benefit rule

tells us which plan provides the maximum excess of total benefits over total costs or the plan that provides society with the maximum net benefit

allocative efficiency

term for resources being deployed to produce just the right amount of each product to satisfy society's wants

cost-benefit analysis

DECIDES WHETHER TO PROVIDE A PARTICULAR PUBLIC GOOD AND HOW MUCH OF IT TO PROVIDE. economic model that compares the marginal costs and marginal benefits of a decision.

consumer surplus

Difference between what a consumer is willing to pay for a good and what the consumer actually pays Paying less than maximum price-damn good deal

Quasi-public goods

Examples of this include education, streets and highways, police and fire protection libraries and museums preventative medicine and sewage disposal

private goods

Goods that are both excludable and rival in consumption -produced in market by firms

public goods

Goods that are neither excludable nor rival in consumption

Government Intervention

May be called upon to achieve economic efficiency when externalities affect large numbers of people or when the community interests are at stake. QUESTION: IS A BAIL-OUT CONSIDERED GOVERNMENT INTERFERENCE? EX CLEAR AIR ACT FORCED FACTORIES AND BUSINESS TO INSTALLMAXIMUM ACHIEVABLE CONTROL TECHNOLOGY WHICH COST THE COMPANY

Coase Theorem

Private sector bargaining can solve externality problem: government's role in correcting externalities

cap and trade

Sets a cap for the total amount of emissions only firms that have purchased permits can pollute. Firms who need to pollute more have the opportunity to buy more pollution rights from other firms who don't need to pollute as much. This limits the total amount of pollution, but how much each firm emits is based on a market system. The tax is imposed on the basis of how much carbon each good contains. This tax works by raising the cost of polluting and reducing the consumption and the amount of CO2.

producer surplus

The amount a seller is paid for a good minus the seller's cost of providing it

excludability

The property of a good whereby a person can be prevented from using it

quasi public goods

a good or service to which excludability could apply but that has such large positive externality that government sponsors its production to prevent an underallocation of resources- highway

specific taxes

a second policy approach to negative externalities is for government to levy taxes or charges specifically on the related good.

Subsidies to producer

a subsidy to producers is a tax in reverse.

subsidies to buyers

again shows the supply and demand situation for positive externalities

externality

an economic side effect of a good or service that generates benefits or costs to someone other than the person deciding how much to produce or consume

positive externalities

benefits created by a public good that are shared by the primary consumer of the good and by society more generally; causes of demand-side market failures

gov fixes negative externalities

direct control specific taxes

demand side market failures

happen when demand curves do not reflect consumers' full willingness to pay for a good or service. Not possible to charge for the product: sidewalks

market failure

market fails to produce the right amount of a product

non excludability

means there is no effective way of excluding individuals from the benefit of the good once it comes into existence

supply side market failures

occur when company does not pay the full cost of producing a good or service

Optimal Reduction of an externality

occurs when society's marginal cost and marginal benefit of reducing that externality are equal MC=MB

Subsidies

payments FROM the government that decrease producer costs

Taxes

payments TO the government that increases producers cost

deadweight loss

the fall in total surplus that results from a market distortion, such as a tax

free-rider problem

the problem faced by interest groups when citizens can reap the benefits of interest group action without actually joining, participating in, or contributing money to such groups.

productive efficiency

the situation in which a good or service is produced at the lowest possible cost

rivalry

when on person buys and consumes a product, that product is still available for another person to buy and consume

Government provision

where positive externalities are extremely large. The government may decide to provide the product for free to everyone. Ex the government aided in eradicating the polio disease by administering free vaccines to all children