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Lecture Economics (18th edition): Chapter 16 - McConnell, Brue, Flynn's

Chapter 16 - Public goods, externalities, and information asymmetries. After completing this unit, you should be able to: Public goods vs. private goods, the optimal quantity of a public good, cost-benefit analysis, externalities, information failures and government intervention. | Public Goods, Externalities, and Information Asymmetries Chapter 16 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter Objectives Public goods vs. private goods The optimal quantity of a public good Cost-benefit analysis Externalities Information failures and government intervention 16- Public Goods Private goods Rivalry and excludability Public goods Nonrivalry Nonexcludability Free-rider problem No market demand 16- 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 16- Demand for Public Goods (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 2 3 4 5 $4 3 2 1 0 $5 4 3 2 1 $9 7 5 3 1 + + + + + = = = = = Example: two individuals Graphically 16- Demand for Public Goods $9 7 5 3 1 0 P Q 1 2 3 4 5 $6 5 4 3 2 1 0 P Q 1 2 3 4 5 $6 5 4 3 2 1 0 P Q 1 2 3 4 5 Adams Benson Collective Demand and Supply D1 D2 DC S Adams’ Demand Benson’s Demand Collective Demand $3 for 2 Items $4 for 2 Items $7 for 2 Items $1 for 4 Items $2 for 4 Items $3 for 4 Items Connect the Dots Collective Willingness To Pay Optimal Quantity 16- 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 16- Externalities Market failure Requires government action Negative externality External cost Overproduction Positive externality External benefit Underproduction 16- Externalities Negative Externalities Positive Externalities 0 D S St Overallocation Negative Externalities St Underallocation Positive Externalities Qo Qo Qe Qe P P 0 Q Q D Dt 16- Coase Theorem Externalities corrected by individual bargaining Property ownership defined Small number . | Public Goods, Externalities, and Information Asymmetries Chapter 16 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter Objectives Public goods vs. private goods The optimal quantity of a public good Cost-benefit analysis Externalities Information failures and government intervention 16- Public Goods Private goods Rivalry and excludability Public goods Nonrivalry Nonexcludability Free-rider problem No market demand 16- 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 16- Demand for Public Goods (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 2 3 4 5 $4 3 2 1 0 $5 4 3 2 1 $9 7 5 3 1 + + + + + = = = = = Example: two individuals Graphically 16- Demand for Public Goods $9