Presentation 1

Fracking Videohttp://www.youtube.com/watch?v=Xg4VNGF

P6qE

Economic RentThe price paid for the use of land and other

natural resources that are completely fixed in total supply

http://www.youtube.com/watch?v=k_fMDcBr9w8

Different Interest RatesDiscount Rate- the interest rate the Fed

charges on loans made to banks (0.75%) Federal Funds Rate- interest rate that banks

charge one another for overnight loans (.25%)

Prime Interest Rate- the benchmark interest rate that banks use as a reference point for loans to individuals and firms (3% higher than the Fed Funds)

Private GoodsA good or service that is individually

consumed and that can be profitably provided by privately owned firms because they can exclude non-payers from receiving the benefits

Ex- goods sold at stores or on the internet

Private Goods Cont’dTwo characteristics:1. Rivalry- when one person buys and

consumes a product, it is not available for another person

2. Excludability- sellers can keep people who do not pay for a product from obtaining its benefits

Public GoodA good or service provided by the

government with 2 characteristics:1. Non-rivalry- one person’s consumption of a

good does not preclude consumption of the good by others

2. Non-excludability- there is no effective way of excluding individuals from the benefit of the good once it comes into existence

Free-Rider ProblemOnce a producer has provided a public good,

everyone including non-payers can benefitWhy pay when it’s for free?

Optimal Quantity of a Public GoodThe government uses surveys and public

votes to estimate the demand for a public good

They then compare the MB of an added unit of the good against the MC of providing it

MB = MC Rule

Cost-Benefit AnalysisA comparison of the marginal cost of a

government project or program with the marginal benefits to decide whether or not to employ resources in that project/program and to what extent

ExternalitiesA cost or benefit from production or

consumption, without compensation to someone other than the buyers and sellers of the product

“Spillover”

Positive ExternalityA benefit obtained without compensation by

third parties for the production or consumption of buyers and sellers

Spillover benefitEx- a beekeeper benefits when a neighboring

farmers plants cloverEx- Having people inoculated from disease

Positive Externality Cont’dWhen positive externalities occur the market

demand curve lies to the left of the full-benefits demand curve (under-allocation)

EX- people who don’t get sick due to others being inoculated

Negative ExternalitiesA cost imposed without compensation on

third parties by the production or consumption of sellers or buyers

EX- manufacturer dumps toxic wastes into the river killing the fish population sought by fisherman

Negative Externalities Cont’dSupply is too high and the government may

need to interveneOver-allocation of this commodity

Negative Externalities Positive Externalities

0

D

S private

S social

Overallocation

NegativeExternalities St

Underallocation

PositiveExternalities

Qo QoQe Qe

P P

0 Q Q

D

Dt

G 28.1

Subsidy to the Buyer for a Positive Externality

Subsidy to the Producer for a Positive Externality

Reducing a Negative Externality through Taxation

Coase TheoremU of Chicago Economist Ronald CoaseBelieved that the government isn’t needed to

regulate external costs/benefits where:A. property ownership is clearly definedB. # of people involved is smallC. bargaining costs are minimal**bargaining will allow acceptable solutions

to the externality problems