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!

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