Transcript Chapter 04 Student PowerPoint Presentation

Chapter 4
Market Failures: Public Goods and
Externalities
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Market Failures
• Market failures
• Markets fail to produce the right amount of
the product
• Resources may be
• Over-allocated
• Under-allocated
LO1
4-2
Demand-Side Market Failures
• Demand-side market failures
• When it is not possible to charge consumers
for the product
• Some can enjoy benefits without paying
• Firms not willing to produce since they cannot
cover the costs
LO1
4-3
Supply-Side Market Failures
• Supply-side market failures
• Occurs when a firm does not pay the full cost
of producing its output
• External costs of producing the good are not
reflected in supply
LO1
4-4
Efficiently Functioning Markets
• Demand curves must reflect the consumers
full willingness to pay
• Supply curve must reflect all the costs of
production
LO2
4-5
Consumer Surplus
• Consumer surplus
• Difference between what a consumer is
willing to pay for a good and what the
consumer actually pays
• Extra benefit from paying less than the
maximum price
LO2
4-6
Producer Surplus
• Producer surplus
• Difference between the actual price a
producer receives and the minimum price
they would accept
• Extra benefit from receiving a higher price
LO2
4-7
Efficiency Revisited
Price (per bag)
Consumer
surplus
S
P1
Producer
surplus
D
Q1
Quantity (bags)
LO2
4-8
Efficiency Losses
• Efficiency loss (or deadweight losses)
a
Efficiency loss
from underproduction
S
Price (per bag)
d
b
e
D
c
Q2
LO2
Q1
Quantity (bags)
4-9
Efficiency Losses
a
Efficiency loss
from overproduction
S
Price (per bag)
f
b
g
D
c
Q1
Q3
Quantity (bags)
LO2
4-10
Private Goods
• Private goods are produced in the market by
firms
• Offered for sale
• Characteristics
• Rivalry
• Excludability
LO3
4-11
Public Goods
• Public goods are provided by government
• Offered for free
• Characteristics
• Nonrivalry
• Nonexcludability
• Free-rider problem
LO3
4-12
Cost-Benefit Analysis
• 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
LO4
4-13
Quasi-Public Goods
• Quasi-public goods could be provided through
the market system
• Because of positive externalities the
government provides them
• Examples are education, streets, museums
LO4
4-14
The Reallocation Process
• Government
• Taxes individuals and businesses
• Takes the money and spends on production
of public goods
LO4
4-15
Externalities
• An externality is a cost or benefit accruing to a
third party external to the market transaction
• Positive externalities
• Too little is produced
• Demand-side market failures
• Negative externalities
• Too much is produced
• Supply-side market failures
LO4
4-16
Externalities
P
Negative
externalities
a
P
St
b
y
St
z
S
Positive
externalities
Dt
x
c
D
D
Overallocation
0
Qo
Qe
(a)
Negative externalities
LO4
Underallocation
Q
0
Qe
Qo
Q
(b)
Positive externalities
4-17
Government Intervention
• Correct negative externalities
• Direct controls
• Specific taxes
• Correct positive externalities
• Subsidies
• Government provision
LO4
4-18
Government’s Role in the Economy
• Coase theorem
• Private sector bargaining can solve
externality problem
• Government’s role in correcting externalities
• Optimal reduction of an externality
• Officials must correctly identify the existence
and cause
• Has to be done within a political environment
LO5
4-19