ECON 213 Prof Young chapter 7

Public Goods

-Can be consumed by many -Difficult to exclude non-payersfrom consumption -Examples: m•Public defense, public parks, public fireworks display •Free-rider problem -Someone has the ability to receive the benefit of a good without paying for it. -Examples: •Eating (and not paying) at a free-will donation meal Letting a classmate do all the work in a group project!

•Benefits

-Difficult to quantify, different for all people

•Incentive to overuse

-Each individual wants to fish as much as possible for higher profits. If one conserves, others will fish even more.

•Inframarginal externality

-Externality that exists, but consequence of a marginal change in activity is effectively zero We must examine total costs and benefits rather than marginal effects.

For negative externalities

-Force individual to pay for external costs -Tax production as disincentive to produce -Regulate production -Overall output is reduced, illustrated by a leftward shift in supply curve (aka MC curve too)

•Costs

-Known amount, easy to compute

•Incentive to ignore others

-No one has the ability to define how many resources can be used. I may still break the rules set even if others follow them.

•Tragedy of the commons

-Occurs when a rival (but non-excludable) good becomes depleted or ruined

Third-Party Problems

-People not directly involved in activity experience positive or negative externalities.

•Cost-benefit analysis

-Process to determine whether the benefits of providing a public good outweigh the costs

•Private property

-Provides exclusive right of ownership that allows for the use and exchange of property -Creates incentive to maintain, protect, and conserve property, as well as listen to the wishes of others

External costs

-The cost of an activity paid for by someone else not directly involved in the activity: pollution and road congestion.

Internalizing the externality

-The individual involved in the activity takes account for social costs (or benefits).

Problems With The Coase Theorem

-Transaction Costs May Exist -bargaining may be expensive -property Rights May Not Be Clearly Assigned sometimes there are legal impediments to what society considers immoral. This can affect the achievement of an economically efficient solution.

Social costs

Sum of internal and external costs

negative externality.

When it is a cost that is imposed on third parties, it is called a

Demand curve

commonly describe the __________ as a measure of the overall benefits of the activity being diagrammed

•Cap and trade

-A system of pollution "permits" that are traded on an open market -Purpose: reduce pollution

The pollution emitted by your car is an example of a(n) a. internal cost. b. social cost. c. external cost. d. production cost. e. public-good cost.

C. External cost

Which of the following is an example of a public good? a.a free outdoor Christmas light display b.a college football game c.a parking spot with a parking meter d.a college education

Correct answer: A For (A) to be correct, note that the word "free" is explicitly included. Imagine a display, outdoors, that anyone can freely see and enjoy. The parking spot is not free, and is rivalrous. College education is not free (at least in the U.S.)

Suppose good X creates a negative externality. Which of the following would NOT be an appropriate way to correct the negative externality? a.subsidize the production of good X b.tax the production of good X c.limit how much of good X can be produced d.require the producers of good X to pay for external costs that arise

Correct answer: A Subsidizing would result in MORE of good X being produced. We want less of the good to be made since it creates the negative externality.

Membership at your local fitness facility is what type of good? a.private good b.club good c.common resource good d.public good

Correct answer: B It's excludable (you have to pay to be a member), but non-rival. Just because one person is a member doesn't mean you can't join as well.

Which of the following activities would most likely create a negative externality? a.eating a slice of pizza b.smoking a cigarette c.taking a nap d.getting a college degree

Correct answer: B Secondhand smoke is a classic example of a negative externality. Third parties who are not smoking experience a cost.

Which of the following activities is most likely to create a positive externality? a.eating a slice of pizza b.smoking a cigarette c.taking a nap getting a college degree

Correct answer: D If you are more educated, other people around may be likely to experience external benefits. You may be more productive, less likely to be unemployed, and may be more politically involved.

Pecuniary (pertaining to money) externality

Externality that operates through prices rather than resources When considering all markets, there is no gain or loss of efficiency. Some economists believe this should not be called an externality

•Incentive to neglect

Good cannot be protected.No political borders or ownership

•Internal costs

The costs of an activity paid by an individual engaging in the activity, fuel, wear/tear

positive externality.

When third parties benefit from an activity in which they are not directly involved, the benefit is called a

Externalities often arise because of?

a lack of clearly defined property rights

Which of the following is true of a negative externality? a.Some costs are borne by a third party. b.The government can use subsidies to encourage firms to internalize the externality. c.The government must take over the production of this good so that the externality can be internalized. d.Some benefits accrue to a third party. e.Its existence always requires corrective measures by the government.

a.Some costs are borne by a third party.

A negative externality exists whenever: •a. there are no internal costs. • b. production of a good creates an external cost. • c. production of a good creates an external benefit. • d. production of a good has no social cost. • e. production of a good has no social benefit.

b. production of a good creates an external cost.

Which of the following is true? •a. social costs = internal costs − external costs • b. social costs = internal costs + external costs • c. internal costs = social costs + external costs • d. external costs = social costs + internal costs • e. internal costs − social costs = external costs

b. social costs = internal costs + external costs

The third-party problem: a. occurs when a market activity leads to a negative externality. b. occurs when a market activity leads to a positive externality. c. occurs when a market activity leads to a negative or a positive externality. d. is the same as the free-rider problem. e. is associated with the production of private goods but not public goods.

c. occurs when a market activity leads to a negative or a positive externality.

Bounded rationality

is the idea that when individuals make decisions, their rationality is limited by the available information, the tractability of the decision problem, the cognitive limitations of their minds, and the time available to make the decision.

Positive Externalities

occurs when one's actions benefit people who were not directly involved in exchange.

Club goods

•(You can be excluded if you don't pay) -Non-rival and excludable -Examples: •Satellite TV, gym membership •Common resource goods (can't be excluded -Rival but non-excludable -Examples: Fishing/hunting, public campsites

Private Goods

•Characteristics of certain consumption goods •Excludable -The good must be purchased before use. •Rival -The good cannot be enjoyed by more than one person (for instance a "rival at the same time. •Private goods -Are both excludable and rival in consumption -Most goods we purchase and consume are private goods.

Solution to the Tragedy of the Commons

•General proactive management is needed. -Taxes, regulations, or other ways to internalize a negative externality •King crab populations have done much better than cod because: 1.Limited length of fishing season 2.Regulations on how much crab the boats can harvest 3.Only adult males are harvested.

Coase's Theorem

•If there are no legal, strategic, or informational barriers to bargaining, and if property rights are clearly defined,... ... then people can always negotiate to an efficient outcome. -Note the minimal role this implies for government.