Post on 01-Jan-2016
AP Econ Week#22
Winter 2014Ch#5
Economics 2/9/15 http://mrmilewski.com
• OBJECTIVE: Continue examination of market failures. APMicro-I.B
• Language objective: Write about dead weight loss.
• I. Journal#53 pt.A-ACDC Econ Anchorman-ACDC Micro 4.13 Dead Weight Loss
• II. Journal#53 pt.B-notes on dead weight loss(Chapter#5)
• Homework: On learnsmart & Finish reading Ch#5
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Efficiency Revisited
LO2
Pric
e (p
er b
ag)
Quantity (bags)
S
Q1
P1
D
Consumer surplus
Producer surplus
5-4
Quantity (bags)
Pri
ce
(pe
r b
ag
)
Efficiency Losses
LO2
c
S
Q1Q2
D
bd
a
e
Efficiency lossfrom underproduction
5-5
Efficiency Losses
LO2
c
S
Q1 Q3
D
bf
a
g
Quantity (bags)
Pri
ce
(pe
r b
ag
)
Efficiency lossfrom overproduction
5-6
Private Goods
• Produced in the market by firms• Offered for sale• Characteristics
• Rivalry• Excludability
LO3 5-7
Public Goods
• Provided by government• Offered for free
• Characteristics• Nonrivalry• Nonexcludability• Free-rider problem
LO3 5-8
Demand for Public Goods
LO3
Demand for a Public Good, Two Individuals
(1)Quantity of Public
Good
(2)Adams’ Willingness
to Pay (Price)
(3)Benson’s
Willingness to Pay (Price)
(4)Collective
Willingness to Pay (Price)
1 $4 + $5 = $9
2 3 + 4 = 7
3 2 + 3 = 5
4 1 + 2 = 3
5 0 + 1 = 1
5-9
Demand for Public Goods
LO3
$6543210
P
Q1 2 3 4 5
$6543210
P
Q1 2 3 4 5Adams
Benson
D1
D2
Adams’ Demand
Benson’s Demand
$3 for 2 Items
$4 for 2 Items
$1 for 4 Items
$2 for 4 Items
$9
7
5
3
10
P
Q1 2 3 4 5Collective Demand and Supply
DC
SCollective Demand
$7 for 2 Items
$3 for 4 Items
Connect the Dots
OptimalQuantity
CollectiveWillingness
To Pay
5-10
Cost-Benefit Analysis
• Cost • Resources diverted from private good
production• Private goods that will not be
produced• Benefit
• The extra satisfaction from the output of more public goods
LO3 5-11
Cost-Benefit Analysis
LO3
Cost-Benefit Analysis for a National Highway Construction Project (in Billions)
(1)Plan
(2)Total Cost of Project
(3)Marginal
Cost
(4)Total
Benefit
(5)Marginal Benefit
(6)Net Benefit
(4) – (2)
No new construction $0 $0 $0
A: Widen existing highways 4 $4 5 $5 1
B: New 2-lane highways 10 6 13 8 3
C: New 4-lane highways 18 8 22 10 5
D: New 6-lane highways 28 10 26 3 -2
5-12
Quasi-Public Goods
• Could be provided through the market system
• Because of positive externalities the government provides them
• Examples: education, streets, libraries
LO3 5-13
The Reallocation Process
• Government• Taxes individuals and businesses• Takes the money and spends on
production of public goods
LO3 5-14
Externalities
• A cost or benefit accruing to a third party external to the transaction
• Positive externalities• Too little is produced• Demand-side market failures
• Negative externalities• Too much is produced• Supply side market failures
LO4 5-15
Externalities
LO4
(a)Negative externalities
(b)Positive externalities
0
D
S
St
Overallocation
NegativeExternalities
St
Underallocation
PositiveExternalities
Qo QoQe Qe
P P
0Q Q
D
Dt
a
c
z
x
b y
5-16
Economics 2/10/15 http://mrmilewski.com
• OBJECTIVE: Continue examination of market failures. APMicro-I.B
• Language objective: Write about market failures.
• I. Journal#54 pt.A-ACDC Micro Market Failures
• II. Journal#54 pt.B-notes on market failures(Chapter#5)
• Notice: Chapter#4&5 Test is on Friday Feb 13th
Government Intervention
• Correct negative externalities• Direct controls• Specific taxes
• Correct positive externalities• Subsidies and government provision
LO4 5-18
Government Intervention
LO4
(a)
Negative Externalities
D
S
St
Overallocation
NegativeExternalities
Qo Qe
P
0 Q
a
c
b
(b)
Correct externality with tax
D
S
St
Qo Qe
P
0Q
a
T
5-19
Government Intervention
LO4
(a)Positive Externalities
0
St
Underallocation
PositiveExternalities
QoQe
D
Dt
z
x
y
(b)Correcting via a subsidy
to consumers
0
St
QoQe
D
Dt
(c)Correcting via a subsidy
to producers
0
S't
QoQe
D
Subsidy
St
Subsidy
U
5-20
Government Intervention
LO4
Methods for Dealing with Externalities
ProblemResource Allocation Outcome Ways to Correct
Negative externalities (spillover costs)
Overproduction of output and therefore overallocation of resources
1. Private bargaining2. Liability rules and lawsuits3. Tax on producers4. Direct controls5. Market for externality rights
Positive externalities (spillover benefits)
Underproduction of output and therefore underallocation of resources
1. Private bargaining2. Subsidy to consumers3. Subsidy to producers4. Government provision
5-21
Society’s Optimal Amounts
LO5
0
So
ciet
y’s
Mar
gin
al B
enef
it a
nd
Mar
gin
alC
ost
of
Po
lluti
on
Ab
atem
ent
(Do
llars
)
Q1
MB
MC
SociallyOptimal AmountOf PollutionAbatement
5-22
Government’s Role in the Economy
• Government can have a role in correcting externalities
• Officials must correctly identify the existence and cause
• Has to be done in the context of politics
LO5 5-23
Controlling Carbon Dioxide Emissions
• Cap and trade• Sets a cap for the total amount of
emissions• Assigns property rights to pollute• Rights can then be bought and sold
• Carbon tax• Raises cost of polluting• Easier to enforce
5-24
Economics 2/11/15 http://mrmilewski.com
• OBJECTIVE: Complete examination of market failures. APMicro-I.B
• Language objective: Write about market failures.
• I. Administrative Stuff-Micro 6.2 Pollution, the Gov’t, and MSB=MSC
• II. Review for Chapter#4&5 Test• Notice: Chapter#4&5 Test is on Friday!
Economics 2/12/15 http://mrmilewski.com
• OBJECTIVE: Complete examination of market failures. APMicro-I.B
• Language objective: Write about market failures.
• I. Administrative Stuff-Micro 6.3 Negative Externalities-ACDC Econ-Micro 6.4 Positive Externalities- ACDC Econ
• II. Review for Chapter#4&5 Test• Notice: Chapter#4&5 Test is TOMORROW!
New Access Code
• W433-DX47-G6NJ-87EA-RH66