1. Principles of Marketing
Public Goods
Microeconomics
All text in these slides is taken from
where it is published under one or more open licenses.
All images in these slides are attributed in the notes of the slide on which they appear and licensed as indicated.
Cover Image: Untitled Author: Radek Grzybows  Located at:  License: Creative Commons Zero
What is Marketing?
Principles of Marketing

2. Externalities
Private markets offer an efficient way to put buyers and sellers together and determine what goods are produced, how they are produced, and who gets them
The effect of a market exchange on a third party who is outside or “external” to the exchange is called an externality.
Because externalities that occur in market transactions affect other parties beyond those involved, they are sometimes called spillovers.
Externalities can be negative or positive.

3. Public Goods Public goods have two defining characteristics:
Nonexcludable: it is costly or impossible to exclude someone from using the good
Non-rivalrous: when one person uses the public good, another can also use it
F-15E Strike Eagle Fighter by U.S. Air Force, CC-BY-NC.

4. Public Goods and Positive Externalities
Public goods have positive externalities
But not all goods and services with positive externalities are public goods
Primary School Children by World Bank Photo Collection, CC-BY-NC-ND.

5. Common Resources Nonexcludable Rivalrous
“Tragedy of the Commons” - no one individual has an incentive to protect that resource and responsibly harvest it

6. Free Rider Problem
A free rider problem can arise, in which people have an incentive to let others pay for the public good and then to “free ride” on the purchases of others

7. Practice Question Why do free rider problems arise?
Public goods are non-excludable.

8. Contributing to a Public Good as a Prisoner’s Dilemma
Samuel (S) Contribute
Samuel (S) Do Not Contribute
Rachel (R) Contribute
R pays $4, receives $6, net gain +$2
S pays $4, receives $6, net gain +$2
R pays $4, receives $3, net gain –$1
S pays $0, receives $3, net gain +$3
Rachel (R) Do Not Contribute
R pays $0, receives $3, net gain +$3
S pays $4, receives $3, net gain –$1
R pays $0, receives $0
S pays $0, receives $0
Principles of Microeconomics Chapter 13.4. Authored by: OpenStax College. Located BY: Attribution. License Terms: Download for free at

9. Government and Public Goods
If people come together through the political process and agree to pay taxes and make group decisions about the quantity of public goods, they can defeat the free rider problem by requiring, through the law, that everyone contributes
Vintage Class Photo, Globe Public School by freeparking, CC-BY-NC.

10. Other Ways to Provide Public Goods
Someone else pays ie. Radio supported by advertisers
Use social pressure to fundraise for non-profit organizations

11. Why Invest in Human Capital?
The positive externalities to education typically include:
better health outcomes for the population
lower levels of crime
a cleaner environment
a more stable, democratic government.
Education clearly benefits the person who receives it, but a society where most people have a good level of education provides positive externalities for all

12. Positive Externalities and Technology
Big Drug faces a cost of borrowing of 8%. If the firm receives only the private benefits of investing in R&D, then its demand curve for financial capital is shown by DPrivate, and the equilibrium will occur at $30 million. Because there are spillover benefits, society would find it optimal to have $52 million of investment. If the firm could keep the social benefits of its investment for itself, its demand curve for financial capital would be DSocial and it would be willing to borrow $52 million
Principles of Microeconomics Chapter 13.2. Authored by: OpenStax College. Located BY: Attribution. License Terms: Download for free at

13. The Market for Flu Shots with Spillover Benefits (A Positive Externality)
The market demand curve does not reflect the positive externality, so only QMarket will be exchanged. This is inefficient since the marginal social benefit exceeds the marginal social cost. If the government provides a consumer subsidy, the level of vaccinations can increase to QSocial
Principles of Microeconomics Chapter 13.2. Authored by: OpenStax College. Located BY: Attribution. License Terms: Download for free at

14. Negative Externality: Pollution
(Credit: modification of image by “NoKXL”/Flickr Creative Commons) in Principles of Microeconomics Chapter 12.1 and  Authored by: OpenStax College. Located BY: Attribution. License Terms: Download for free at

15. Taking Social Costs into Account: A Supply Shift
If the firm takes only its own costs of production into account, then its supply curve will be Sprivate, and the market equilibrium will occur at E0. Accounting for additional external costs of $100 for every unit produced, the firm’s supply curve will be Ssocial. The new equilibrium will occur at E1
Principles of Microeconomics Chapter 12.1 and  Authored by: OpenStax College. Located BY: Attribution. License Terms: Download for free at

16. Market Failure
Because externalities represent a case where markets no longer consider all social costs, but only some of them, economists commonly refer to externalities as an example of market failure

17. External Costs and Deadweight Loss
Forcing firms to include external costs shifts supply to the left. The deadweight loss that occurs when firms are not faced with the full costs of their decisions is shown by the shaded area in the graph.
Principles of Microeconomics Section 6.3. Authored by: Anonymous. Located at:  BY-NC-SA: Attribution-NonCommercial-ShareAlike

18. Government Options in Addressing Market Failure
Command and control regulation specifies how much pollution could be emitted and imposes penalties if that limit is exceeded. Other command and control regulations require the installation of certain equipment to reduce pollution
Market-oriented tools

19. Command and Control Regulation
Pro
Con
highly successful in protecting and cleaning up the U.S. environment
no incentive to improve the quality of the environment beyond the standard set by the law
Inflexible – all firms face the same law no matter how efficient or inefficient it would be for them to follow it
subject to compromises in the political process. Existing firms lobby to turn stricter environmental standards into barriers to entry

20. Clean Air and Water Cost Benefit
Government economists have estimated that U.S. firms may pay more than $200 billion per year to comply with federal environmental laws.
people may stay healthier and live longer
certain industries that rely on clean air and water, such as farming, fishing, and tourism, may benefit
property values may be higher
people may simply enjoy a cleaner environment in a way that does not need to involve a market transaction

21. Is it worth it?
A middle-range estimate of the health and other benefits from cleaner air was $22 trillion—about 44 times higher than the costs
A more recent study by the EPA estimated that the environmental benefits to Americans from the Clean Air Act will exceed their costs by a margin of four to one
What is a human life worth?

22. Marginal Costs and Marginal Benefits of Environmental Protection
Reducing pollution is costly— resources must be sacrificed. The marginal costs of reducing pollution are generally increasing, because the least expensive and easiest reductions can be made first, leaving the more expensive methods for later. The marginal benefits of reducing pollution are generally declining, because the steps that provide the greatest benefit can be taken first, and steps that provide less benefit can wait until later
Principles of Microeconomics Chapter 12.5. Authored by: OpenStax College. Located BY: Attribution. License Terms: Download for free at

23. Practice Question
How might the marginal costs and benefits graph explain the difference between the analysis of the Clean Air Act suggesting that benefits were 44 times higher than costs and the more recent study showing that benefits are 4 times higher than costs?
The more recent study represents a more recent point on the marginal cost and benefit curve. Some of the changes that produced the most bang for the buck have already been done. However, benefits still outweigh costs 4 to 1.

24. How Governments Can Encourage Innovation
Well-designed intellectual property laws
Government spending on research and development
Tax breaks for research and development
Cooperative research

25. Market-Oriented Environmental Tools
A pollution charge is a tax imposed on the quantity of pollution that a firm emits
Marketable permit program
Better defined property rights

26. How Pollution Charges Work
Principles of Microeconomics Chapter 12.4. Authored by: OpenStax College. Located BY: Attribution. License Terms: Download for free at

27. How Marketable Permits Work
Firm Alpha
Firm Beta
Firm Gamma
Firm Delta
Current emissions—permits distributed free for this amount
200 tons
400 tons
600 tons
0 tons
How much pollution will these permits allow in one year?
100 tons
300 tons
Actual emissions one year in the future
150 tons
50 tons
Buyer or seller of marketable permit?
Buys permits for 50 tons
Doesn’t buy or sell permits
Sells permits for 100 tons
Principles of Microeconomics Chapter 12.4. Authored by: OpenStax College. Located BY: Attribution. License Terms: Download for free at

28. How Effective are Market-oriented Tools?
The advantage of market-oriented environmental tools is not that they reduce pollution by more or less, but because of their incentives and flexibility, they can achieve any desired reduction in pollution at a lower cost to society

29. Quick Review What is the difference between public and private goods?
What are free riders?
What are positive and negative externalities? What are some examples of each?
How effective are government policies to lessen negative externalities?
How does the government promote positive externalities?
How do market-based solutions affect negative externalities?