Chapter 4 Market Failures: Public Goods and externalities

case theorem

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

an example of a nonexludability is

street lighting, the police

private goods

- Produced in the market by firms - goods that are both excludable and rival in consumption - goods offered for sale Rivalry and Excludability

cost

- resources diverted from private good production - private goods that will not be produced

Quasi - Public Goods

-Could be provided through the market system -Because of positive externalities the government provides them -Examples are education, streets, museums

optimal reduction of an externality

-Officials must correctly identify the existence and cause - government failure may occur

demand-side market failures

-When it is not possible to charge consumers for the product -Some can enjoy benefits without paying -Firms not willing to produce since they cannot cover the costs

Non-rival

the consumption of the good by one person does not keep other people from also consuming that good.

consumer surplus

the difference between the highest price a consumer is willing to pay for a good or service and the actual price the consumer pays - extra benefit from paying less than the maximum price

government intervention

Correct negative externalities Direct controls pigovian tax Correct positive externalities Subsidies Government provision

free rider problem

For a group, the problem of people not joining because they can benefit from the group's activities without joining.

Market Failures

Markets fail to produce the right amount of the product

Resources may be

Over-allocated Under-allocated

Under allocated

The condition of resources when they are assigned to do less work than their normal work capacity.

over allocated

The condition of resources when they are assigned to do more work than is their normal work capacity

nonexcludability

The inability to keep nonpayers (free riders) from obtaining benefits from a certain good; a characteristic of a public good.

Supply-side market failures occur when:

a firm does not pay the full cost of producing its output

cost-benefit analysis

a study that compares the costs and benefits to society of providing a public good

public goods

are goods provided by government offered for free

Efficiently Functioning Markets

demand curve must reflect the consumers full willingness to pay and supply curve must reflect all the costs of production - benefit surpluses are maximized for consumers and producers

producer surplus

difference between the actual price a producer receives and the minimum price they would accept - extra benefit from receiving a higher price

in a supply-side market external costs of producing the

good are not reflected in supply

The Reallocation process

government - taxes individuals and businesses - takes the money and spends on production of public goods

Externalities

is the cost or benefit accruing to a third party external to the market transaction

Characteristics of public goods

nonrivalry nonexcludability free rider problem

benefit

the extra satisfaction from the output of more public goods

Excludability

the property of a good whereby a person can be prevented from using it ( you don't buy it, you can't get it)

positive externalities

too little is produced demand-side market failures

negative externalities

too much is produced supply side market failures

rivalry

when one person buys and consumes a product, it is not available for another person to buy and consume