Copyright 2008 The McGraw-Hill Companies 28-1 Public Goods Cost-Benefit Analysis Externalities...
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Copyright 2008 The McGraw-Hill Companies 28-1 Public Goo ds Cost-Benef it Analysi s Externalit ies Informatio n Failures Last Word Key Terms End Show Unit 7 The Role of Government
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Transcript of Copyright 2008 The McGraw-Hill Companies 28-1 Public Goods Cost-Benefit Analysis Externalities...
Copyright 2008 The McGraw-Hill Companies28-1
Public GoodsCost-Benefit AnalysisExternalitiesInformation FailuresLast Word
Key Terms
End Show
Unit7
The Role of Government
Copyright 2008 The McGraw-Hill Companies28-2
Public GoodsCost-Benefit AnalysisExternalitiesInformation FailuresLast Word
Key Terms
End Show
Objectives• Market Failure &
Government Failure• How Public Goods are
Distinguished from Private Goods• Review of Cost-Benefit Analysis• About Externalities (Spillover
Costs and Benefits) and the Methods to Remedy Them
• How Information Failures Can Justify Government Interventions in Some Markets
• Lorenz Curve & Gini Coefficient• Tariff Graph
Copyright 2008 The McGraw-Hill Companies28-3
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Economic Functions of US Gov’t
• Enforce laws & contracts• Maintain competition• Provide an economic safety net• Provide public goods• Correct market failures
• correct negative externalities, subsidize positive externalities, provide market information
• Stabilize the economy (macro)• Unemployment, inflation, promote
economic growth
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Public Goods• Private Goods
–Rival–Excludable
• Public Goods–Nonrival–Nonexcludable
–The Free-Rider Problem
W 28.1
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Public vs. Private Goods
NON-EXCLUDABLE
Excludable
NON-RIVAL •Pure Public Goods•Club Goods (aka
Toll Goods)
Rival•Common Resources
(aka common-pool resources)
•Pure Private Goods
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Public vs. Private Goods
Examples?NON-
EXCLUDABLEExcludable
NON-RIVAL
Rival
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Public vs. Private Goods
NON-EXCLUDABLE
Excludable
NON-RIVAL
•National Defense
•Free Public Radio
•Street Lights
•Judicial System
•Cable TV
•Health Care
•Roads (toll)
Rival
•Public Park
•Fish
•Water
•Roads (non-toll)
•Hunting Grounds
•Ice Cream
•Clothes
•Restaurants
•Cars
•TVs
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Cost-Benefit Analysis• Concept• Marginal Cost =
Marginal Benefit Rule(MC=MB)
Private vs.Social
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ExternalitiesNegative Externalities Positive Externalities
0
D=MPB
MPC
MSC
Overallocation
NegativeExternalities
S=MPC
Underallocation
PositiveExternalities
Qo QoQe Qe
P P
0 Q Q
• Negative Externality: – draw MSC above MPC
• Positive Externality:– draw MSB above MPB
• Note diff. between Qe & Qo
D=MPB
D1=MSB
G 28.1
O 28.1
O 28.2
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Negative ExternalitiesCreates costs in additionto the private costsExamples: Pollution, DrumSet, ethanol plant, 2nd hand smoke…(MSC > MPC)
How we can compensate for neg. externality?• Individual bargaining• Liability through lawsuit• Price Control (ie. ceiling)• Taxes• Market Externality Rights
– ie. fee for creation of X amount of pollution.
D=MPB
S=MPC
MSC
Overallocation
NegativeExternalities
Qo Qe
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DD
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BB
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AA
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AA
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CC
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Positive ExternalitiesProvides benefits in
addition to the private
Benefits (MSB > MPB)
Examples: rose bushes, education, …
How we can compensate for pos. externality?• Individual bargaining• Subsidize either production or
consumption (the one producing the externality
0Underallocation
PositiveExternalities
QoQe
D=MPB
MSB
S=MPC
Copyright 2008 The McGraw-Hill Companies28-17
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EE
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Example: Neg. ExternalityCarbon-Dioxide Emissions, Tons Per Capita, Selected Nations 2004
GLOBAL PERSPECTIVE
United StatesAustralia
CanadaCzech Republic
GermanyJapan
United KingdomItaly
SpainFrance
0 5 10 15 20 25
19.8
17.0
16.2
11.8
10.3
9.2
8.8
7.4
7.2
6.2
Source: OECD Environmental Data
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Asymmetric Information
Discuss with a partner...
• BRAINSTORM Question:
• WHY does a new car lose substantial market value as soon as it is purchased?
Copyright 2008 The McGraw-Hill Companies28-20
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Lojack: A Case of Positive Externalities
• Private Crime Reduction Expenditures $300 Billion
• Some Redistribute Rather than Reduce Crime
• Lojack Car Recoveries are 95% Versus 60% for Others
• Locates and Stops Chop Shops• Estimated 15 Times MSB to
Consumers• Underallocation Result• Subsidize Consumer Purchase with
Lower Insurance Rates• Discounts too Small to Offset
Underallocation
Last
Word
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Types of TaxesProgressive Income increase, you pay a HIGHER percent of income to tax
Proportional Income increase, you pay the SAME percent of income to tax
Regressive Income increase, you pay a LOWER percent of income to tax
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Measuring Income InequalityThe Lorenz Curve
Gini = A / (A+B) [larger = more unequal]
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BB
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AA
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Tariff Graph
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Key Terms• private goods• public goods• free-rider proble
m• cost-benefit anal
ysis• marginal-cost-m
arginal-benefit-rule
• Externalities (+/-)
• market for externality rights
• optimum reduction of an externality
• asymmetric information• moral hazard problem• adverse selection• Lorenz Curve• Gini Coefficient• Tariff Graph
Copyright 2008 The McGraw-Hill Companies28-28
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Information Failures• Asymmetric Information:• Inadequate Information
Involving Sellers– Example: Gasoline Market– Example: Licensing of
Surgeons• Inadequate Information
Involving Buyers– Moral Hazard Problem– Adverse Selection Problem– Workplace Safety
• Qualification
O 28.3
