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
