AP Econ Week#22 Winter 2014 Ch#5

Economics 2/9/15 OBJECTIVE: Continue examination of market failures. APMicro-I.B Language objective: Write about dead weight loss. I. Journal#53 pt.A -ACDC Econ AnchormanACDC Econ Anchorman -ACDC Micro 4.13 Dead Weight LossACDC Micro 4.13 Dead Weight Loss II. Journal#53 pt.B -notes on dead weight loss (Chapter#5) Homework: On learnsmart & Finish reading Ch#5

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Efficiency Revisited LO2 Price (per bag) Quantity (bags) S Q1Q1 P1P1 D Consumer surplus Producer surplus 5-4

Quantity (bags) Price (per bag) Efficiency Losses LO2 c S Q1Q1 Q2Q2 D b d a e Efficiency loss from underproduction 5-5

Efficiency Losses LO2 c S Q1Q1 Q3Q3 D b f a g Quantity (bags) Price (per bag) Efficiency loss from overproduction 5-6

Private Goods Produced in the market by firms Offered for sale Characteristics Rivalry Excludability LO3 5-7

Public Goods Provided by government Offered for free Characteristics Nonrivalry Nonexcludability Free-rider problem LO3 5-8

Demand for Public Goods LO3 Demand for a Public Good, Two Individuals (1) Quantity of Public Good (2) Adams’ Willingness to Pay (Price) (3) Benson’s Willingness to Pay (Price) (4) Collective Willingness to Pay (Price) 1$4+$5=$9 23+4=7 32+3=5 41+2=3 50+1=1 5-9

Demand for Public Goods LO3 $ P Q $ P Q Adams Benson D1D1 D2D2 Adams’ Demand Benson’s Demand $3 for 2 Items $4 for 2 Items $1 for 4 Items $2 for 4 Items $ P Q Collective Demand and Supply DCDC S Collective Demand $7 for 2 Items $3 for 4 Items Connect the Dots Optimal Quantity Collective Willingness To Pay 5-10

Cost-Benefit Analysis Cost Resources diverted from private good production Private goods that will not be produced Benefit The extra satisfaction from the output of more public goods LO3 5-11

Cost-Benefit Analysis LO3 Cost-Benefit Analysis for a National Highway Construction Project (in Billions) (1) Plan (2) Total Cost of Project (3) Marginal Cost (4) Total Benefit (5) Marginal Benefit (6) Net Benefit (4) – (2) No new construction $0 A: Widen existing highways 4$45$51 B: New 2-lane highways C: New 4-lane highways D: New 6-lane highways

Quasi-Public Goods Could be provided through the market system Because of positive externalities the government provides them Examples: education, streets, libraries LO3 5-13

The Reallocation Process Government Taxes individuals and businesses Takes the money and spends on production of public goods LO3 5-14

Externalities A cost or benefit accruing to a third party external to the transaction Positive externalities Too little is produced Demand-side market failures Negative externalities Too much is produced Supply side market failures LO4 5-15

Externalities LO4 (a) Negative externalities (b) Positive externalities 0 D S StSt Overallocation Negative Externalities StSt Underallocation Positive Externalities QoQo QoQo QeQe QeQe P P 0 QQ D DtDt a c z x b y 5-16

Economics 2/10/15 OBJECTIVE: Continue examination of market failures. APMicro-I.B Language objective: Write about market failures. I. Journal#54 pt.A -ACDC Micro Market FailuresACDC Micro Market Failures II. Journal#54 pt.B -notes on market failures (Chapter#5) Notice: Chapter#4&5 Test is on Friday Feb 13 th

Government Intervention Correct negative externalities Direct controls Specific taxes Correct positive externalities Subsidies and government provision LO4 5-18

Government Intervention LO4 (a) Negative Externalities D S StSt Overallocation Negative Externalities QoQo QeQe P 0 Q a c b (b) Correct externality with tax D S StSt QoQo QeQe P 0 Q a T 5-19

Government Intervention LO4 (a) Positive Externalities 0 StSt Underallocation Positive Externalities QoQo QeQe D DtDt z x y (b) Correcting via a subsidy to consumers 0 StSt QoQo QeQe D DtDt (c) Correcting via a subsidy to producers 0 S' t QoQo QeQe D Subsidy StSt U 5-20

Government Intervention LO4 Methods for Dealing with Externalities Problem Resource Allocation OutcomeWays to Correct Negative externalities (spillover costs) Overproduction of output and therefore overallocation of resources 1.Private bargaining 2.Liability rules and lawsuits 3.Tax on producers 4.Direct controls 5.Market for externality rights Positive externalities (spillover benefits) Underproduction of output and therefore underallocation of resources 1.Private bargaining 2.Subsidy to consumers 3.Subsidy to producers 4.Government provision 5-21

Society’s Optimal Amounts LO5 0 Society’s Marginal Benefit and Marginal Cost of Pollution Abatement (Dollars) Q1Q1 MB MC Socially Optimal Amount Of Pollution Abatement 5-22

Government’s Role in the Economy Government can have a role in correcting externalities Officials must correctly identify the existence and cause Has to be done in the context of politics LO5 5-23

Controlling Carbon Dioxide Emissions Cap and trade Sets a cap for the total amount of emissions Assigns property rights to pollute Rights can then be bought and sold Carbon tax Raises cost of polluting Easier to enforce 5-24

Economics 2/11/15 OBJECTIVE: Complete examination of market failures. APMicro-I.B Language objective: Write about market failures. I. Administrative Stuff -Micro 6.2 Pollution, the Gov’t, and MSB=MSCMicro 6.2 Pollution, the Gov’t, and MSB=MSC II. Review for Chapter#4&5 Test Notice: Chapter#4&5 Test is on Friday!

Economics 2/12/15 OBJECTIVE: Complete examination of market failures. APMicro-I.B Language objective: Write about market failures. I. Administrative Stuff -Micro 6.3 Negative Externalities-ACDC EconMicro 6.3 Negative Externalities-ACDC Econ -Micro 6.4 Positive Externalities- ACDC EconMicro 6.4 Positive Externalities- ACDC Econ II. Review for Chapter#4&5 Test Notice: Chapter#4&5 Test is TOMORROW!

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