1. Public goods and Externalities
Market Failures
Public goods and Externalities

2. Market Failures in Competitive Markets
Demand-Side Market Failures
Impossible to Charge the right price
Willingness
Supply-Side Market Failures
Not paying full cost of producing its output
Pay capital costs but not for things like pollution

3. Efficiently Functioning Markets
Consumer Surplus
Benefit surplus received by a consumer
Difference between max. willing price to actual price
Max. price depends on alternative uses of money
Producer Surplus
Difference between price producer receives and the minimum acceptable price
Minimum price often marginal price
Positive relationship between equilibrium price and the producer surplus
Efficiency Revisited
Efficiency Losses (deadweight losses)

4. Efficiently Functioning Markets
Efficiency Revisited
Productive Efficiency- competition forces producers to use best technology and resources to minimize per unit cost
Allocative Efficiency- correct quantity produced relative to other goods and services
Efficiency Losses (deadweight losses)
Reductions of combined consumer and producer surplus
Result of both and under and overproduction

5. Public Goods Private goods characteristics
Rivalry- a product bought and consumed is no longer available to another buyer
Excludability- seller keeps people who don’t pay from obtaining the product or its benefits
Public goods characteristics
Nonrivalry-Everyone can simultaneously obtain the benefits of a public good
Nonexcludability- no effective way of excluding individuals from the benefits of a good
Free-rider problem
Private firms don’t produce public goods
Only government can finance through taxation

6. Public Goods Optimal Quantity of a public good Demand for Public goods
Non determinable unless through surveys and public votes
Demand for Public goods
Willingness to pay schedule
Survey
Willingness to pay curve (demand curve)

7. Public Goods Comparing MB and MC Cost Benefit Analysis
Marginal Benefit and Marginal Cost
optimal quantity when MB=MC
Cost Benefit Analysis
Means in which to determine whether to provide a public good and how much to provide
Resources towards public goods if the public good exceeds need for more private goods
The benefit must exceed the cost to be economically justifiable
Marginal-cost-marginal-benefit rule: Tells you the plan that provides society with the maximum net benefit

8. Public Goods Quasi-Public goods Reallocation Process
Goods and services that could be produced and delivered in a way that exclusion would be possible
Ex. Education, streets, highways, police, libraries, museums
Government typically provides to avoid underallocation of resources
Reallocation Process
Government diverts purchasing power from private spenders to government, typically through taxes
Frees resources from private use
Tax proceeds then used to provide public good

9. Externalities
Externality- the costs or the benefits of a good or service are passed onto or “spill over to” someone other than the immediate buyer or seller
Negative Externalities
Cause supply-side market failures
Ex. Polluted air, Airport noise, foul smelling gas
Cost exceeds total benefit
Marginal cost lower than company paying for such a cost
Positive Externalities

10. Externalities Positive Externalities Government Intervention
Demand-side market failures
Willingness to pay for third parties receiving the benefit
Ex. vaccinations
Government Intervention
Government may step in if Externalities affect large numbers of people
Pass legislation, ex. Clear Air Act of 1990
Taxes, Tax CFC manufacturing (Ozone depleting material)
Subsidies to buyers
Subsidies to producers
Government provisions, Ex polio vacines

11. Society’s Optimal Amount of Externality Reduction
MC,MB, and equilibrium Quantity
Optimal reduction of an externality- MC=MB
Shifts in Locations of the Curves
Technology improvements, ex pollution control equipment
Governments Role in the Economy
Inefficiency may seep in due to incentive for officials