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AP Micro Government and Market Failure
- 1. 30 CHAPTER Government And Market Failure
- 2. PUBLIC GOODS Rivalry &Excludability (Chapter 5) Private Goods Divisibility Demand Curve is Horizontal Summation Public Goods Indivisibility
- 3. DEMAND FOR APUBLIC GOOD Problems of Revealing Preferences Adams’ Benson’s Collective Willingness Willingness Willingness Quantity to pay (price) to pay (price) to pay (price) 1 Exclusion Principle does not apply
- 4. DEMAND FOR APUBLIC GOOD Problems of Revealing Preferences Adams’ Benson’s Collective Willingness Willingness Willingness Quantity to pay (price) to pay (price) to pay (price) 1 $4 + $5 = $9
- 5. DEMAND FOR APUBLIC GOOD Problems of Revealing Preferences Adams’ Benson’s Collective Willingness Willingness Willingness Quantity to pay (price) to pay (price) to pay (price) 1 $4 + $5 = $9 2 3 + 4 = 7
- 6. DEMAND FOR APUBLIC GOOD Problems of Revealing Preferences Adams’ Benson’s Collective Willingness Willingness Willingness Quantity to pay (price) to pay (price) to pay (price) 1 $4 + $5 = $9 2 3 + 4 = 7 3 2 + 3 = 5
- 7. DEMAND FOR APUBLIC GOOD Problems of Revealing Preferences Adams’ Benson’s Collective Willingness Willingness Willingness Quantity 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. DEMAND FOR APUBLIC GOOD Problems of Revealing Preferences Adams’ Benson’s Collective Willingness Willingness Willingness Quantity 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. OPTIMAL AMOUNT OFA PUBLIC GOOD P $9 7 5 Adams’ willingness 3 to pay 1 D1 Q 0 1 2 3 4 5
- 10. OPTIMAL AMOUNT OFA PUBLIC GOOD P $9 7 Benson’s willingness to pay 5 3 D2 1 D1 Q 0 1 2 3 4 5
- 11. OPTIMAL AMOUNT OFA 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. OPTIMAL AMOUNT OFA 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. OPTIMAL AMOUNT OFA 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. COST-BENEFIT ANALYSIS Marginal Cost= Marginal Benefit Rule Externalities Spillover Costs Overallocation Spillover Benefits Underallocation
- 15. SPILLOVER COSTS ANDBENEFITS P St Spillover costs S D Overallocation 0 Q0 Qe Q
- 16. SPILLOVER COSTS ANDBENEFITS P St Spillover Benefits Dt D Underallocation 0 Qe Q0 Q
- 17. SPILLOVER COSTS ANDBENEFITS Individual Bargaining – Coase Theorem Liability Rules and Lawsuits Government Intervention Direct Controls Specific Taxes Subsidies and Government Provision
- 18. CORRECTING SPILLOVER COSTS P St Spillover costs S TAX Overallocation Corrected D 0 Q0 Qe Q
- 19. CORRECTING SPILLOVER BENFITS P S Spillover Benefits Dt Underallocation D 0 Qe Q0 Q
- 20. CORRECTING SPILLOVER BENFITS PCorrecting by Subsidy to Consumers S Subsidy to consumer increases demand Dt Underallocation D Corrected 0 Qe Q0 Q
- 21. CORRECTING SPILLOVER BENFITS PCorrecting by Subsidy to Producers Subsidy to St producers increases supply S’t Underallocation Corrected D 0 Qe Q0 Q
- 22. A MARKET-BASED APPROACH TO SPILLOVER COSTS The Tragedy of the Commons A 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. SOCIETY’S OPTIMAL AMOUNT OF EXTERNALITY REDUCTION Application of MC = MB Rule MC, MB Equilibrium Optimal Reduction of an Externality Shifts in the Curves Graphically…
- 24. SOCIETY’S OPTIMAL AMOUNT OF EXTERNALITY REDUCTION Society’s marginal benefit and marginal MC cost of pollution abatement Socially optimum amount of pollution abatement MB 0 Q1 Amount of pollution abatement
- 25. RECYCLING Market for Recyclable Inputs Policy •Demand Incentives •Supply Incentives Global Warming Theory
- 26. RECYCLING Information Failures Asymmetric Information Inadequateinformation … about sellers about buyers Moral Hazard Problem Adverse Selection Problem •Workplace Safety
- 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 problem Copyright McGraw-Hill/Irwin, 2005 BACK END
- 28. Public Choice Theory And The Economics of Taxation Chapter 31