Chapter 15 Public goods, externalities & market failure

1. Chapter 15Public goods, externalities & market failure Selected sections of chapter 15

2. Private goods • 2 characteristics • Rivalry in consumption – when one person buys and consumes a good, it is not available to others. • Excludability – Sellers can restrict the benefits to those who pay for the good. • Examples???

3. Public goods • Public goods are those goods that are nonrival and nonexcludable. • What is an example of a public good? • Is it nonrival? • Is it nonexcludable?

4. Public goods suffer from the free- rider problem • Free-rider problem • where a consumer can enjoy the benefit of the good without having to pay for the benefit.

5. Public goods • Demand for public goods differs form the market demand for private goods. • Phantom demand • Supply of public goods • Marginal cost curve

6. Optimal quantity of a public good Compare marginal benefits & marginal costs

7. Cost-benefit analysis is a technique for decision making in the public sector. • Compare benefit of providing incremental units of public goods with the costs of providing these additional units.

8. Externalities • A cost or benefit incurred by a third party to a transaction.

9. Negative externalities • occur when producers are able to shift some of their costs onto the community. • How do we illustrate this on a graph?

10. Positive externalities • occur when the benefits of a good are received by others in the community although they did not pay for them. • these benefits are not reflected in the individual demand curve. • How do we illustrate this on a graph?

11. Government Intervention to deal with externalities • Negative externalities • Direct government controls or taxes • Positive externalities • Subsidies or government provision