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    Public Goods, Externalities, and Information Asymmetries

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    alyannahhidago
    This document discusses several key economic concepts related to public goods, externalities, and information asymmetries. It defines public goods as being nonrival and nonexcludable, which can lead to free-rider problems. It also discusses how governments estimate demand for public goods and supply them by comparing marginal benefits to marginal costs. Externalities are discussed as market failures that require government intervention to address negative externalities like pollution or positive externalities like education. Information asymmetries between buyers and sellers can also cause market failures.

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    Public Goods, Externalities, and Information Asymmetries

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    alyannahhidago
    18 views16 pages
    This document discusses several key economic concepts related to public goods, externalities, and information asymmetries. It defines public goods as being nonrival and nonexcludable, which can lead to free-rider problems. It also discusses how governments estimate demand for public goods and supply them by comparing marginal benefits to marginal costs. Externalities are discussed as market failures that require government intervention to address negative externalities like pollution or positive externalities like education. Information asymmetries between buyers and sellers can also cause market failures.

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    microecon 08

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    This document discusses several key economic concepts related to public goods, externalities, and information asymmetries. It defines public goods as being nonrival and nonexcludable, which can lead to free-rider problems. It also discusses how governments estimate demand for public goods and supply them by comparing marginal benefits to marginal costs. Externalities are discussed as market failures that require government intervention to address negative externalities like pollution or positive externalities like education. Information asymmetries between buyers and sellers can also cause market failures.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    18 views16 pages

    Public Goods, Externalities, and Information Asymmetries

    Uploaded by

    alyannahhidago
    This document discusses several key economic concepts related to public goods, externalities, and information asymmetries. It defines public goods as being nonrival and nonexcludable, which can lead to free-rider problems. It also discusses how governments estimate demand for public goods and supply them by comparing marginal benefits to marginal costs. Externalities are discussed as market failures that require government intervention to address negative externalities like pollution or positive externalities like education. Information asymmetries between buyers and sellers can also cause market failures.

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    You are on page 1of 16

    Public Goods,

    Externalities, and
    Information
    Asymmetries
    Public Goods
    • Private goods
    – Rivalry and excludability
    • Public goods
    – Nonrivalry
    – Nonexcludability
    – Free-rider problem
    – No market demand
    Optimal Quantity of a
    Public Good
    • Supplied by the government
    • Government estimates demand
    • Compare marginal benefit to
    marginal cost
    • Demand for a public good
    – Sum individual willingness to pay
    – Sum vertically
    Demand for Public Goods
    Example: two individuals
    (1) (2) (3) (4)
    Quantity Adams’ Benson’s Collective
    Of Public Willingness Willingness Willingness
    Good To Pay (Price) To Pay (Price) To Pay (Price)

    1 P4 + P5 = P9
    2 3 + 4 = 7
    3 2 + 3 = 5
    4 1 + 2 = 3
    5 0 + 1 = 1

    Graphically…
    Demand for Public Goods
    Collective Demand S Optimal
    Quantity
    P7 for 2 Items P9

    P
    7 Collective
    P3 for 4 Items Willingness
    5
    DC To Pay
    Connect the Dots 3
    1

    Collective Demand and Supply


    0 1 2 3 4 5
    Benson’s Demand

    Q
    P4 for 2 Items P
    P6
    5
    4 D2
    P2 for 4 Items 3
    2
    1
    Benson
    0
    Adams’ Demand 1 2 4 Q

    5
    P3 for 2 Items P
    P6 5

    P1 for 4 Items D1
    4
    3
    2
    1

    Adams
    0 Q
    Cost-Benefit Analysis
    • Provide a public good?
    • How much should be provided?
    • Resources are limited
    • Marginal-cost-marginal-benefit rule
    • Allocate government resources to
    maximize net benefit
    Externalities
    • Market failure
    – Requires government action
    • Negative externality
    – External cost
    – Overproduction
    • Positive externality
    – External benefit
    – Underproduction
    Externalities
    P P
    Negative
    Externalities
    St St
    Positive
    S Externalities

    Dt

    D D
    Overallocation Underallocation
    0 Qo Qe Q 0 Qe Qo Q

    Negative Positive
    Externalities Externalities
    Coase Theorem
    • Externalities corrected by
    individual bargaining
    – Property ownership defined
    – Small number people
    – Bargaining costs negligible
    • Limitations
    • Liability rules and lawsuits
    Government Intervention
    • Correct negative externality
    – Direct controls
    – Specific taxes
    • Correct positive externality
    – Subsidize buyers or producers
    – Government provision
    Market Based Approach
    • Tragedy of the commons
    – Resource lacks defined ownership
    – Air, lakes, etc.
    – No incentive to maintain
    • Market for externality rights
    – Right to pollute
    – Can be bought and sold
    Market for Pollution Rights
    • Advantages
    • Real-world examples
    P
    D2018 S=Supply of
    Price Per Pollution Right

    Pollution
    D2008 Rights
    P200

    P100

    0 500 750 1000 Q


    Quantity of 1-Ton Pollution Rights
    Optimal Externality Reduction
    • How much pollution abatement?
    • MC = MB
    Society’s Marginal Benefit and Marginal MC
    Cost of Pollution Abatement (Dollars)

    Socially
    Optimal Amount
    Of Pollution
    Abatement

    MB

    0 Q1
    Climate Change
    • Earth has warmed over the last
    century
    • Human activity contributing factor
    • Carbon dioxide and greenhouse
    effect
    • Kyoto Protocol 1997
    • Climate change policies
    Information Failures
    • Asymmetric information
    • Inadequate buyer information
    – Gasoline market
    – Licensing of surgeons
    • Inadequate seller information
    – Moral hazard problem
    – Adverse selection problem
    – Workplace safety
    • Qualification
    Lojack: A Case of Positive
    Externalities
    • Crime reduction expenditures
    – Some redistribute vs. reduce crime
    • Lojack car recoveries 95% vs. 60%
    • External benefits
    – Catch thieves
    – Locate and stop chop shops
    • MSB 15 times the MC
    – Underallocation

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