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Chapter 18 Externalities and Public Goods DERYA GÜLTEKİN-KARAKAŞ Externalities and Public Goods DERYA GÜLTEKİN-KARAKAŞ.

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Presentation on theme: "Chapter 18 Externalities and Public Goods DERYA GÜLTEKİN-KARAKAŞ Externalities and Public Goods DERYA GÜLTEKİN-KARAKAŞ."— Presentation transcript:

1 Chapter 18 Externalities and Public Goods DERYA GÜLTEKİN-KARAKAŞ Externalities and Public Goods DERYA GÜLTEKİN-KARAKAŞ

2 Chapter 18Slide 2 Topics to be Discussed Externalities Public Goods

3 Chapter 18Slide 3 Externalities Negative Action by one party imposes a cost on another party Positive Action by one party benefits another party

4 Chapter 18Slide 4 External Cost Scenario Steel plant dumping waste in a river The entire steel market effluent can be reduced by lowering output (fixed proportions production function)

5 Chapter 18Slide 5 External Cost Scenario Marginal External Cost (MEC) is the cost imposed on fishermen downstream for each level of production. Marginal Social Cost (MSC) is MC plus MEC.

6 MC S = MC I D P1P1 Aggregate social cost of negative externality P1P1 q1q1 Q1Q1 MSC MSC I When there are negative externalities, the marginal social cost MSC is higher than the marginal cost. External Costs Firmaların MC eğrilerinin Firm output Price Industry output Price MEC MEC I The differences is the marginal external cost MEC. q* P* Q* The industry competitive output is Q 1 while the efficient level is Q*. The profit maximizing firm produces at q1 while the efficient output level is q*.

7 Chapter 18Slide 7 External Cost Negative Externalities encourage inefficient firms to remain in the industry and create excessive production in the long run.

8 Chapter 18Slide 8 Externalities Positive Externalities and Inefficiency Externalities can also result in too little production, as can be shown in an example of home repair and landscaping.

9 Chapter 18Slide 9 MC P1P1 External Benefits Repair Level Value D Is research and development discouraged by positive externalities? q1q1 MSB MEB When there are positive externalities (the benefits of repairs to neighbors), marginal social benefits MSB are higher than marginal benefits D. q*q* P* A self-interested home owner invests q 1 in repairs. The efficient level of repairs q* is higher. The higher price P 1 discourages repair.

10 Chapter 18Slide 10 Public Goods Question When should government replace firms as the producer of goods and services?

11 Chapter 18Slide 11 Public Goods Public Good Characteristics Nonrival  For any given level of production the marginal cost of providing it to an additional consumer is zero. Nonexclusive  People cannot be excluded from consuming the good.

12 Chapter 18Slide 12 Public Goods Not all government produced goods are public goods Some are rival and exclusive  Education  Parks

13 Chapter 18Slide 13 D1D1 D2D2 D When a good is nonrival, the social marginal benefit of consumption (D), is determined by vertically summing the individual demand curves for the good. Efficient Public Good Provision Output 0 Benefits (dollars) 12345678109 $4.00 $5.50 $7.00 Marginal Cost $1.50 Efficient output occurs where MC = MB at 2 units of output. MB is $1.50 + $4.00 or $5.50.

14 Chapter 18Slide 14 Public Goods Public Goods and Market Failure How much national defense did you consume last week?

15 Chapter 18Slide 15 Public Goods Free Riders There is no way to provide some goods and services without benefiting everyone. Households do not have the incentive to pay what the item is worth to them. Free riders understate the value of a good or service so that they can enjoy its benefit without paying for it.

16 Chapter 18Slide 16 Public Goods Establishing a mosquito abatement company How do you measure output? Who do you charge? A mosquito meter?


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