P Q CORRECTING SPILLOVER COSTS D 0 Spillover costs StSt S TAX Overallocation Corrected Q0Q0 QeQe.
16 - 1 Public Goods Demand for a Public Good Optimal Amount of a Public Good Cost-Benefit Analysis...
19
16 - 1 Public Goods Demand for a Public Good Optimal Amount of a Public Good Cost-Benefit Analysis Spillover Costs and Benefits Market-Based Approach to Spillover Rights Society’s Optimal Amount of Externality Reduction Information Failures Unit 5 Market Failures
-
Upload
percival-lucas -
Category
Documents
-
view
212 -
download
0
Transcript of 16 - 1 Public Goods Demand for a Public Good Optimal Amount of a Public Good Cost-Benefit Analysis...
16 - 1
Public Goods
Demand for a Public Good
Optimal Amount of a Public Good
Cost-Benefit Analysis
Spillover Costs and Benefits
Market-Based Approach to Spillover Rights
Society’s Optimal Amount of Externality Reduction
Information Failures
Unit 5
Market Failures
16 - 2
Public Goods
Demand for a Public Good
Optimal Amount of a Public Good
Cost-Benefit Analysis
Spillover Costs and Benefits
Market-Based Approach to Spillover Rights
Society’s Optimal Amount of Externality Reduction
Information Failures
Private Goods• Divisible• Excludable• Demand Curve
is Horizontal Summation
Public Goods• Indivisible• Not Excludable• Demand Curve
is Vertical Summation
PUBLIC GOODS
16 - 3
Public Goods
Demand for a Public Good
Optimal Amount of a Public Good
Cost-Benefit Analysis
Spillover Costs and Benefits
Market-Based Approach to Spillover Rights
Society’s Optimal Amount of Externality Reduction
Information Failures
Problems of Revealing Preferences
Quantity
Adams’Willingness
to pay (price)
Benson’sWillingness
to pay (price)
CollectiveWillingness
to pay (price)
12345
$4 3 2 1 0
$5 4 3 2 1
$9 7 5 3 1
+++++
=====
DEMAND FOR A PUBLIC GOOD
Adam is a Free Rider
16 - 4
Public Goods
Demand for a Public Good
Optimal Amount of a Public Good
Cost-Benefit Analysis
Spillover Costs and Benefits
Market-Based Approach to Spillover Rights
Society’s Optimal Amount of Externality Reduction
Information Failures
P
Q
$ 9 7
5
3
1
0 1 2 3 4 5
D = MSB
S = MSC
OPTIMAL AMOUNT OF A PUBLIC GOOD
Yields theoptimum amount
of the public good
MSB = MSC
16 - 5
Public Goods
Demand for a Public Good
Optimal Amount of a Public Good
Cost-Benefit Analysis
Spillover Costs and Benefits
Market-Based Approach to Spillover Rights
Society’s Optimal Amount of Externality Reduction
Information Failures
Externalities• Market failure
–Requires government action
• Negative externality–External (spillover) cost–Overproduction
• Positive externality–External (spillover) benefit–Underproduction
16 - 6
Public Goods
Demand for a Public Good
Optimal Amount of a Public Good
Cost-Benefit Analysis
Spillover Costs and Benefits
Market-Based Approach to Spillover Rights
Society’s Optimal Amount of Externality Reduction
Information Failures
Externalities
Correcting Externalities• Individual Bargaining –
Coase Theorem• Liability Rules and Lawsuits• Government Intervention
–Direct Control–Taxes–Subsidies
16 - 7
Public Goods
Demand for a Public Good
Optimal Amount of a Public Good
Cost-Benefit Analysis
Spillover Costs and Benefits
Market-Based Approach to Spillover Rights
Society’s Optimal Amount of Externality Reduction
Information Failures
P
Q
CORRECTING NEGATIVE EXTERNALITIES
D = MSB
0
Spillovercosts
S = MSC
S = MPC
TAX
OverallocationCorrected
Q0 Qe
16 - 8
Public Goods
Demand for a Public Good
Optimal Amount of a Public Good
Cost-Benefit Analysis
Spillover Costs and Benefits
Market-Based Approach to Spillover Rights
Society’s Optimal Amount of Externality Reduction
Information Failures
P
Q
D = MSB
0
Subsidy toproducersincreases
supply
S = MPC
S = MSC
UnderallocationCorrected
Qe Q0
Correcting by Subsidy to ProducersCORRECTING POSITIVE EXTERNALITIES
16 - 9
Public Goods
Demand for a Public Good
Optimal Amount of a Public Good
Cost-Benefit Analysis
Spillover Costs and Benefits
Market-Based Approach to Spillover Rights
Society’s Optimal Amount of Externality Reduction
Information Failures
A MARKET-BASED APPROACH
A Market for Externality Rights
S = Supply of pollution rights
D 2012
Pric
e pe
r pol
lutio
n rig
ht
Quantity of pollution rights500 750 1000
$200
$100
D 2004
16 - 10
Public Goods
Demand for a Public Good
Optimal Amount of a Public Good
Cost-Benefit Analysis
Spillover Costs and Benefits
Market-Based Approach to Spillover Rights
Society’s Optimal Amount of Externality Reduction
Information Failures
Market Failures
• Tragedy of the Commons• Asymmetric (Unequal)
Information–about sellers
• Licensing• Weights & Measures
–about buyers• Moral Hazard Problem• Adverse Selection
16 - 11
Public Goods
Demand for a Public Good
Optimal Amount of a Public Good
Cost-Benefit Analysis
Spillover Costs and Benefits
Market-Based Approach to Spillover Rights
Society’s Optimal Amount of Externality Reduction
Information Failures
TAX STRUCTURES
Who pays the tax?• Benefits-Received Principle• Ability-to-Pay Principle
Tax as a percentage of income:• Progressive Tax• Regressive Tax• Proportional Tax
16 - 12
Public Goods
Demand for a Public Good
Optimal Amount of a Public Good
Cost-Benefit Analysis
Spillover Costs and Benefits
Market-Based Approach to Spillover Rights
Society’s Optimal Amount of Externality Reduction
Information Failures
TAX APPLICATIONS:
• Personal Income TaxProgressive• Sales TaxRegressive• Corporate Income TaxProportional• Payroll TaxesRegressive• Property TaxesRegressive• Estate & Gift TaxesProgressive
Identify whether progressive, regressive, or proportional
16 - 13
Public Goods
Demand for a Public Good
Optimal Amount of a Public Good
Cost-Benefit Analysis
Spillover Costs and Benefits
Market-Based Approach to Spillover Rights
Society’s Optimal Amount of Externality Reduction
Information Failures
Revisiting Deadweight LossRole of Elasticity (ED & ES)
Qualifications• Redistributive Goals• Reducing Negative
Externalities
TAX INCIDENCE ANDEFFICIENCY LOSS
16 - 14
Public Goods
Demand for a Public Good
Optimal Amount of a Public Good
Cost-Benefit Analysis
Spillover Costs and Benefits
Market-Based Approach to Spillover Rights
Society’s Optimal Amount of Externality Reduction
Information Failures
How a Tax Effects Welfare
A
F
B
D
C
E
Quantity0
Price
Demand
Supply
= PB
Q2
= PS
Pricebuyers
pay
Pricesellers
receive
= P1
Q1
Pricewithout tax
16 - 15
Public Goods
Demand for a Public Good
Optimal Amount of a Public Good
Cost-Benefit Analysis
Spillover Costs and Benefits
Market-Based Approach to Spillover Rights
Society’s Optimal Amount of Externality Reduction
Information Failures
20 40 60 80 100
100
80
60
40
20
0
Percent of Families
Per
cen
t o
f In
com
e Perfect Equality
CompleteInequality
Lorenz Curve (actual distribution)
Area betweenthe lines shows
the degree ofincome inequality
THE LORENZ CURVE
16 - 16
Public Goods
Demand for a Public Good
Optimal Amount of a Public Good
Cost-Benefit Analysis
Spillover Costs and Benefits
Market-Based Approach to Spillover Rights
Society’s Optimal Amount of Externality Reduction
Information Failures
20 40 60 80 100
100
80
60
40
20
0
Percent of Families
Per
cen
t o
f In
com
e Perfect Equality
CompleteInequality
Lorenz Curve (actual distribution)
Area betweenthe lines shows
the degree ofincome inequality
THE LORENZ CURVE
Gini RatioNumerical Measure of Overall
Dispersion of Income
Area Between Lorenz Curve and Diagonal
Total Area Below the Diagonal
GiniRatio=
16 - 17
Public Goods
Demand for a Public Good
Optimal Amount of a Public Good
Cost-Benefit Analysis
Spillover Costs and Benefits
Market-Based Approach to Spillover Rights
Society’s Optimal Amount of Externality Reduction
Information Failures
BIG BANANA BAD
16 - 18
Public Goods
Demand for a Public Good
Optimal Amount of a Public Good
Cost-Benefit Analysis
Spillover Costs and Benefits
Market-Based Approach to Spillover Rights
Society’s Optimal Amount of Externality Reduction
Information Failures
• Ability Differences• Education and Training• Discrimination• Preferences and Risks• Unequal Distribution of
Wealth• Market Power• Luck, Connections, and
Misfortune
CAUSES OF INCOME INEQUALITY
16 - 19
Public Goods
Demand for a Public Good
Optimal Amount of a Public Good
Cost-Benefit Analysis
Spillover Costs and Benefits
Market-Based Approach to Spillover Rights
Society’s Optimal Amount of Externality Reduction
Information Failures
Sample Exam
• Work on the following questions from Unit 5:
• 15, 29, 30, 44, 45 & 60
