View
1
Download
0
Category
Preview:
Citation preview
Topic-1
Public goods &
Private goods
1.Type of goods
1.Public
goods
2.Private
goods
3.Merit
goods
Asymmetric information
Moral hazard.
Adverse selection
1.Public goods
Public goods are those goods that can be
consumed simultaneously by everyone.
Some examples of public goods- air , defense
and lighthouse, public park. street lights Etc.
Some goods are provided by the govt to the
entire people called PG.
Features of public goods.
1.Non-rival- benefit to one person doesn't reduce
benefit of the other. e.g if one can intake vitamin
D from son it would not reduce the availability
vitamin D for others.
2.non-excludable- one can not refuse to anyone
to consume public goods. E.g- air.
3.Indivisible – one can not divide public goods
for personal used only.
4. Free riding problem- a person who
consumes a good without paying for it.
5.Marginal cost is zero or near zero-
6.Same commodity provide at different prices.
Charge different amount of taxes on highways.
7.Total demand is calculated by mode of vertical
addition of demand.
2.Private goods
Private goods are those goods that can not be
consumed simultaneously by entire people.
Some examples of private goods are-car, food,
house,etc.
Features of Private goods
1.Non-rival- benefit to one person
doesn't reduce benefit of the other.
e.g if one can intake vitamin D from
son it would not reduce vitamin D
for others.
2.non-excludable- one can not
refuse to anyone to consume public
goods. E.g- air.
3.Indivisible – one can not divide
public goods for personal used only.
4. Free riding problem- a person
who consumes a good without
paying for it.
Public goods Private goods
1.rival- benefit of one
person can reduce the
benefit of other. eg.
Food(burger)
2.excludable- one can
refuse other to use pvt
goods.(car)
3.divisible-one can divide
pvt goods.
4.Pvt goods are not free-
Public goods Private goods
5.Marginal cost is not
zero.
6.Same commodity
provide at same price
eg(Price of car same in all
markets)
5.Marginal cost is zero or
near zero-
6.Same commodity provide
at different prices. Charge
different amount of taxes on
highways.
7.Total demand is calculated
by mode of vertical addition
of demand.
7.Total demand is calculated
by mode of horizontal
addition of demand.
3.Merit goods
Concept of merit goods given by R.A.Musgrave.
Merit goods are those goods which have some
positive externalities.
Govt provide those services either free or low
rate.
Examples of MG are- education, vaccination, law
cost housing.etc.
demerit goods
Demerit goods are those goods which have
some negative externalities.
eg.- alcohol, tobacco.
Asymmetric information
It means one person doesn't have full information
about kind and types of other person, ie-hidden
quality, taste, nature.
It also known as information failure.
When the seller of a good or services has greater
knowledge than the buyer.
Assy. Info. Also known as the market for lemons
Given by George Akerlof in 1970.
George Akerlof, M.Spence and Joseph Stiglitz
jointly won nobel prize in economic science in 2001
for their research related assy. Info.
Two effect of Assy. Info.
1.Adverse
selection
2.Moral
hazard
Both terms used in economics, risk management,
and insurance.
1.Advesrse selection
Adverse selection is occur when there is lack of
symmetric information to deal bw a buyer and
seller.
A.S can arise in case of insurance-
high premium –who smoke.
Low premium –no smoke.
Adverse selection is mainly related with eco
friendly products.
High cost of such products- therefore price is high
Consumer don’t purchase because of lack
information about quality.
Adverse selection occurs when buyers have better information than sellers, and this can
distort the usual market process. It can lead to missing markets as firms do not find it
profitable to sell a good.
•A company insuring cars will find those living in high crime areas will be more likely to
want to get car insurance. Again if the average cost is charged, it can lead to insurance
firm losing out.
•A company selling life insurance will find that people at higher risk of death will be
more willing to take out life insurance. If the insurance company charges an average
price, but only high-risk consumers buy – they will make a loss.
2.Moral hazard
When the party with a superior information
benefits himself while imposing cost on those with
inferior information.
A doctor has more knowledge about medicine than
its patient.
A car seller know more about that car than buyer.
Market failure.
Market failure occur when there is an inefficient
allocation of resources in free market.
Causes of Market failure.
1.externality- positive and negative.
2.Environment concern
3.Underproduction of merit goods.
4.Overproduction of demerit goods.
5.Abuse of monopoly power.
5.Incomplete market.
Causes of Market failure.
6.common property resources.
7.Asymmetric information.
8.Public goods.
9.Public bads.
Previous year ques.
Previous year ques.
Previous year ques.
Previous year ques.
Recommended