Public goods - Group of Economics...Demerit goods are those goods which have some negative...

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Topic-1 Pu blic goods & Private goods

Transcript of Public goods - Group of Economics...Demerit goods are those goods which have some negative...

Page 1: Public goods - Group of Economics...Demerit goods are those goods which have some negative externalities. eg.- alcohol, tobacco. Asymmetric information It means one person doesn't

Topic-1

Public goods &

Private goods

Page 2: Public goods - Group of Economics...Demerit goods are those goods which have some negative externalities. eg.- alcohol, tobacco. Asymmetric information It means one person doesn't

1.Type of goods

1.Public

goods

2.Private

goods

3.Merit

goods

Asymmetric information

Moral hazard.

Adverse selection

Page 3: Public goods - Group of Economics...Demerit goods are those goods which have some negative externalities. eg.- alcohol, tobacco. Asymmetric information It means one person doesn't

1.Public goods

Public goods are those goods that can be

consumed simultaneously by everyone.

Some examples of public goods- air , defense

and lighthouse, public park. street lights Etc.

Some goods are provided by the govt to the

entire people called PG.

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Features of public goods.

1.Non-rival- benefit to one person doesn't reduce

benefit of the other. e.g if one can intake vitamin

D from son it would not reduce the availability

vitamin D for others.

2.non-excludable- one can not refuse to anyone

to consume public goods. E.g- air.

3.Indivisible – one can not divide public goods

for personal used only.

4. Free riding problem- a person who

consumes a good without paying for it.

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5.Marginal cost is zero or near zero-

6.Same commodity provide at different prices.

Charge different amount of taxes on highways.

7.Total demand is calculated by mode of vertical

addition of demand.

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2.Private goods

Private goods are those goods that can not be

consumed simultaneously by entire people.

Some examples of private goods are-car, food,

house,etc.

Features of Private goods

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1.Non-rival- benefit to one person

doesn't reduce benefit of the other.

e.g if one can intake vitamin D from

son it would not reduce vitamin D

for others.

2.non-excludable- one can not

refuse to anyone to consume public

goods. E.g- air.

3.Indivisible – one can not divide

public goods for personal used only.

4. Free riding problem- a person

who consumes a good without

paying for it.

Public goods Private goods

1.rival- benefit of one

person can reduce the

benefit of other. eg.

Food(burger)

2.excludable- one can

refuse other to use pvt

goods.(car)

3.divisible-one can divide

pvt goods.

4.Pvt goods are not free-

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Public goods Private goods

5.Marginal cost is not

zero.

6.Same commodity

provide at same price

eg(Price of car same in all

markets)

5.Marginal cost is zero or

near zero-

6.Same commodity provide

at different prices. Charge

different amount of taxes on

highways.

7.Total demand is calculated

by mode of vertical addition

of demand.

7.Total demand is calculated

by mode of horizontal

addition of demand.

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3.Merit goods

Concept of merit goods given by R.A.Musgrave.

Merit goods are those goods which have some

positive externalities.

Govt provide those services either free or low

rate.

Examples of MG are- education, vaccination, law

cost housing.etc.

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demerit goods

Demerit goods are those goods which have

some negative externalities.

eg.- alcohol, tobacco.

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Asymmetric information

It means one person doesn't have full information

about kind and types of other person, ie-hidden

quality, taste, nature.

It also known as information failure.

When the seller of a good or services has greater

knowledge than the buyer.

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Assy. Info. Also known as the market for lemons

Given by George Akerlof in 1970.

George Akerlof, M.Spence and Joseph Stiglitz

jointly won nobel prize in economic science in 2001

for their research related assy. Info.

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Two effect of Assy. Info.

1.Adverse

selection

2.Moral

hazard

Both terms used in economics, risk management,

and insurance.

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1.Advesrse selection

Adverse selection is occur when there is lack of

symmetric information to deal bw a buyer and

seller.

A.S can arise in case of insurance-

high premium –who smoke.

Low premium –no smoke.

Adverse selection is mainly related with eco

friendly products.

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High cost of such products- therefore price is high

Consumer don’t purchase because of lack

information about quality.

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Adverse selection occurs when buyers have better information than sellers, and this can

distort the usual market process. It can lead to missing markets as firms do not find it

profitable to sell a good.

•A company insuring cars will find those living in high crime areas will be more likely to

want to get car insurance. Again if the average cost is charged, it can lead to insurance

firm losing out.

•A company selling life insurance will find that people at higher risk of death will be

more willing to take out life insurance. If the insurance company charges an average

price, but only high-risk consumers buy – they will make a loss.

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2.Moral hazard

When the party with a superior information

benefits himself while imposing cost on those with

inferior information.

A doctor has more knowledge about medicine than

its patient.

A car seller know more about that car than buyer.

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Market failure.

Market failure occur when there is an inefficient

allocation of resources in free market.

Causes of Market failure.

1.externality- positive and negative.

2.Environment concern

3.Underproduction of merit goods.

4.Overproduction of demerit goods.

5.Abuse of monopoly power.

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5.Incomplete market.

Causes of Market failure.

6.common property resources.

7.Asymmetric information.

8.Public goods.

9.Public bads.

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