AP Micro Government and Market Failure

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AP Micro Government and Market Failure

  1. 1. 30CHAPTERGovernment AndMarket Failure
  2. 2. PUBLIC GOODSRivalry & Excludability(Chapter 5)Private GoodsDivisibilityDemand Curve is Horizontal SummationPublic Goods Indivisibility
  3. 3. DEMAND FOR A PUBLIC GOODProblems of Revealing Preferences Adams’ Benson’s Collective Willingness Willingness WillingnessQuantity to pay (price) to pay (price) to pay (price) 1 Exclusion Principle does not apply
  4. 4. DEMAND FOR A PUBLIC GOODProblems of Revealing Preferences Adams’ Benson’s Collective Willingness Willingness WillingnessQuantity to pay (price) to pay (price) to pay (price) 1 $4 + $5 = $9
  5. 5. DEMAND FOR A PUBLIC GOODProblems of Revealing Preferences Adams’ Benson’s Collective Willingness Willingness WillingnessQuantity to pay (price) to pay (price) to pay (price) 1 $4 + $5 = $9 2 3 + 4 = 7
  6. 6. DEMAND FOR A PUBLIC GOODProblems of Revealing Preferences Adams’ Benson’s Collective Willingness Willingness WillingnessQuantity to pay (price) to pay (price) to pay (price) 1 $4 + $5 = $9 2 3 + 4 = 7 3 2 + 3 = 5
  7. 7. DEMAND FOR A PUBLIC GOODProblems of Revealing Preferences Adams’ Benson’s Collective Willingness Willingness WillingnessQuantity to pay (price) to pay (price) to pay (price) 1 $4 + $5 = $9 2 3 + 4 = 7 3 2 + 3 = 5 4 1 + 2 = 3
  8. 8. DEMAND FOR A PUBLIC GOODProblems of Revealing Preferences Adams’ Benson’s Collective Willingness Willingness WillingnessQuantity to pay (price) to pay (price) to pay (price) 1 $4 + $5 = $9 2 3 + 4 = 7 3 2 + 3 = 5 4 1 + 2 = 3 5 0 + 1 = 1
  9. 9. OPTIMAL AMOUNT OF A PUBLIC GOOD P$9 7 5 Adams’ willingness 3 to pay 1 D1 Q 0 1 2 3 4 5
  10. 10. OPTIMAL AMOUNT OF A PUBLIC GOOD P$9 7 Benson’s willingness to pay 5 3 D2 1 D1 Q 0 1 2 3 4 5
  11. 11. OPTIMAL AMOUNT OF A PUBLIC GOOD P When vertically$9 added equals collective 7 willingness to pay 5 3 D2 1 DC D1 Q 0 1 2 3 4 5
  12. 12. OPTIMAL AMOUNT OF A PUBLIC GOOD P$9 S 7 The public good’s marginal cost 5 as shown by S 3 1 DC Q 0 1 2 3 4 5
  13. 13. OPTIMAL AMOUNT OF A PUBLIC GOOD P$9 S 7 Yields the optimum amount of the public good 5 MB = MC 3 1 DC Q 0 1 2 3 4 5
  14. 14. COST-BENEFIT ANALYSISMarginal Cost = Marginal Benefit RuleExternalitiesSpillover Costs OverallocationSpillover Benefits Underallocation
  15. 15. SPILLOVER COSTS AND BENEFITSP St Spillover costs S D Overallocation0 Q0 Qe Q
  16. 16. SPILLOVER COSTS AND BENEFITSP St Spillover Benefits Dt D Underallocation0 Qe Q0 Q
  17. 17. SPILLOVER COSTS AND BENEFITSIndividual Bargaining – Coase Theorem Liability Rules and LawsuitsGovernment Intervention Direct Controls Specific Taxes Subsidies and Government Provision
  18. 18. CORRECTING SPILLOVER COSTS P St Spillover costs STAX Overallocation Corrected D 0 Q0 Qe Q
  19. 19. CORRECTING SPILLOVER BENFITSP S Spillover Benefits Dt Underallocation D0 Qe Q0 Q
  20. 20. CORRECTING SPILLOVER BENFITSP Correcting by Subsidy to Consumers S Subsidy to consumer increases demand Dt Underallocation D Corrected0 Qe Q0 Q
  21. 21. CORRECTING SPILLOVER BENFITSP Correcting by Subsidy to Producers Subsidy to St producers increases supply S’t Underallocation Corrected D0 Qe Q0 Q
  22. 22. A MARKET-BASED APPROACH TO SPILLOVER COSTSThe Tragedy of the CommonsA Market for Externality Rights •Operation of the Market •Advantages D 2004 S = Supply of pollution rights Price per pollution right $200 $100 D 2012 500 750 1000 Quantity of pollution rights
  23. 23. SOCIETY’S OPTIMAL AMOUNT OF EXTERNALITY REDUCTIONApplication of MC = MB RuleMC, MB EquilibriumOptimal Reduction of an ExternalityShifts in the Curves Graphically…
  24. 24. SOCIETY’S OPTIMAL AMOUNT OF EXTERNALITY REDUCTIONSociety’s marginal benefit and marginal MC cost of pollution abatement Socially optimum amount of pollution abatement MB 0 Q1 Amount of pollution abatement
  25. 25. RECYCLINGMarket for Recyclable InputsPolicy •Demand Incentives •Supply IncentivesGlobal Warming Theory
  26. 26. RECYCLINGInformation FailuresAsymmetric InformationInadequate information … about sellers about buyersMoral Hazard ProblemAdverse Selection Problem •Workplace Safety
  27. 27. cost-benefit analysis marginal-cost – marginal-benefit rule externalities Coase theorem tragedy of the commons market for externality rights optimal reduction of an externality asymmetric information moral hazard problem adverse selection problemCopyright McGraw-Hill/Irwin, 2005 BACK END
  28. 28. Public Choice Theory AndThe Economics of Taxation Chapter 31

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