6/13/2014CRC Microeconomics1. 6/13/2014CRC Microeconomics2 What did you study last time? Chapter 9 Externalities Solutions

04/11/23 CRC Microeconomics 1


What did you study last time?

Chapter 9Externalities

Externalities Solutions


Do you know …

the special characteristics of goods? the different types of goods? the importance of private property

rights? what public goods are? what common resources are?


a. Excludability• When one person uses a

good/service, others are not able to use the same good/service.

• Only one person, often the owner, can use the good/service (due to private property rights).

• e.g. a car, a cone of ice cream, etc.

1. What are the special characteristics of goods/services?


b. Nonexcludability• The same good/service is available

to all, i.e. everybody owns the good.

• e.g. police protection, the light, etc.




c. Rivalry• When one person uses a

good/service, there is less of it for others.

• e.g. a car, an apple, etc.



d. Nonrivalry• The same amount of the

good/service is available to all.• e.g. the light, police protection, etc.


2. What are the different types of goods?

a. Private goods

Excludable + rival, e.g. an apple, a car, etc.

b. Natural monopoliesExcludable + nonrival, e.g. cable TV, etc.


2. What are the different types of goods?

c. Common resourcesNonexcludable + rival, e.g. environment, etc.

d. Public goodsNonexcludable + nonrival, e.g. national defense


Summary Table

Private Goods. Ice-cream cones

. Clothing. Congested toll roads

Natural Monopolies. Fire protection

. Cable TV. Uncongested toll roads

Common Resources. Fish in the ocean. The environment

. Congested nontoll roads

Public Goods. Tornado siren

. National defense. Uncongested nontoll

roads

Yes No

Rival in consumption?

Yes

No

Excludable?


3. Why are private property rights important?

In all cases, the market fails to allocate resources efficiently because property rights are not well-established.

i.e. some item of value does not have an owner with the legal authority to control it.


3. Why are private property rights important?

When the absence of property rights causes a market failure, the government can potentially solve the problem.

e.g. sale of pollution permits, restriction on hunting seasons, etc.


4. What are public goods?

What is a public good? What is the main problem involving

public goods? (The free-rider problem) Some examples of public goods How much should a public good be

provided? (Cost-benefit analysis)


a. What is a public good?

A public good is a good that is neither excludable nor rival, e.g. firework displays

e.g. Everyone can watch the same firework display.


b. What is the main problem involving public goods?

The free-rider problemBecause public goods are not excludable, people have the incentive to be free riders.

A free riderA person who receives the benefit of a good but avoids paying for it.


b. What is the main problem involving public goods?

The free-rider problem prevents private markets from supplying public goods.

If the government decides that the total benefits exceed the costs, it can provide the public good and pay for it with tax revenue, making everyone better off.


c. Some examples of public goods

National defense$1,200 per person in 2002 (U.S.)

Basic researchNSF subsidizes basic research in many fields.

Fighting povertyTemporary assistance to needy families, Food Stamp program, etc.


d. How much should public goods be provided?

The Cost-Benefit analysisA study that compares the total costs and benefits to society of providing a public good.


d. How much should public goods be provided?

The findings on the costs and benefits are rough approximation.

It is difficult to assess such things as:- the value of life, consumer’s time, and aesthetics.- WTP and WTR.


5. What are common resources?

What is a common resource? What is the problem involving common

resources? (The tragedy of the commons)

Some important common resources


a. What is a common resource?

A common resource is a good that is non- excludable, and yet rival, e.g. air, fish in the ocean, etc.

It is available free of charge to anyone who want to use it.


b. What is the problem involving common resources?

The tragedy of the commons.• Common resources get used more than is

desirable from the standpoint of society as a whole.

• When one person uses a common resource, s(h)e diminishes other people's enjoyment of it. Because of this negative externality, common resources tend to be used excessively.


b. What is the problem involving common resources?

The government can solve this problem through regulation or taxes, or can turn the common resource into a private good.


c. Some examples of common resources

Clean air and water Congested roads Oil pools and underground water Fish, whales, and wildlife


Now you know …

the special characteristics of goods. the different types of goods. the importance of private property rights. what public goods are. what common resources are.


What will you study next time?

Chapter 12The Design of the Tax System

What are the criteria of an efficient tax system?

How to evaluate some tax systems? What are the principles used to achieve

equity in a tax system?


Documents

6/13/2014CRC Microeconomics1. 6/13/2014CRC Microeconomics2 What did you study last time? Chapter 9 Externalities Solutions