Transcript Handout for Lecture 20

Chapter 11
Externalities &
Public Goods
Externalities and Public Goods
• Externalities
– External costs of production, e.g. pollution
– Steel Factory S(K,L)
– Steel factory S( ,
)
– Steel Factory S(K,L) =
Fishery F(
,
)
Fishery F(
,
)
Externalities and Public Goods
• Externalities
– External costs of production
– Steel Factory F(K,L) = S + DW
– Fishery F(L,DW)
So Steel Production Up, DW up
Fish down
What happens if the steel factory
does not take this into account?
Externalities and Public Goods
Selling Steel at price PS
‘Selling’ pollution at price 0
(don’t have to pay to get rid of it!)
And get too much steel and too little fish
Saw before firms hire workers and capital people up
to the point that
dQ
MRPL  PS
 W  MC L
dL
But if had to clean up the dirty water
dQ
MRPL  (PS  PDW )
W
dL
dQ
dQ
PS
 W  PDW
dL
dL
Saw before firms hire workers and capital people up
to the point that
dQ
dQ
MRPL  PS
 W  PDW
dL
dL
So to get the benefit of the steel
(MRPL), the real cost of producing is:
THE CASE FOR GOVERNMENT INTERVENTION
Similarly:
dQ
dQ
MRPK  PS
 r  PDW
dK
dK
• So we say MC of steel is less than
• the MSC of steel
• I.e. MC<MSC
• Externalities
– External costs of production
MSC > MC
External costs in production
Costs and benefits
MC = S
P
D
O
Q1
Quantity
THE CASE FOR GOVERNMENT INTERVENTION
• Externalities
– External costs of production
MSC > MC
– External benefits of production
MSC < MC
– External costs of consumption
MSB < MB
– External benefits of consumption
MSB > MB
Toothpaste
PUBLIC GOODS
• Goods which are ‘non-rival’ and ‘nonexclusive’
• Non-rival/Exclusive- my consumption does
not preclude yours
– e.g. Concert
• Non-exclusive/Rival – cannot limit access
e.g. breathing in air
•
Non-rival and non-exclusive
–street lighting: A Public Good
Marginal benefit from Streetlignts
Dr. Jeckyl
O
Q1
Quantity
Maureen
Hyde
O
Q1
Quantity
MC
Marginal benefit from Streetlights
P1
Dr. Jeckyl
O
Q1
Maureen
Hyde
P1
O
MC
Q1
Quantity
Q1