Microeconomics Chapter 4 Notes
Microeconomics Chapter 4 Notes ECON 1010
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This 3 page Class Notes was uploaded by Danyn Notetaker on Thursday March 3, 2016. The Class Notes belongs to ECON 1010 at Tulane University taught by Armine Shahoyan in Summer 2015. Since its upload, it has received 11 views. For similar materials see Microeconomics in Economcs at Tulane University.
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Date Created: 03/03/16
Market Failures: Public goods and Externalities Market failure in a Competitive Market - Market failures can occur in competitive markets - Demand side of market failures • Occur because at times its impossible • Fireworks There is no way to prevent people who didn’t pay for ﬁreworks from seeing them • • Private ﬁrms are not willing to produce the ﬁreworks - Supply-side market failure • Occur because the production fails to pay the full cost of production • Pollution - The ﬁrm pays for all the resources it uses, but not the pollution it creates - The ﬁrm therefor produces more electricity and pollution than the form would produce if they payed for the pollution they create Efﬁciently Functioning Market - To be efﬁcient Demand must be fully reﬂect consumers willingness to pay • • Supply must fully reﬂect all cost of production - Consumer surplus • Deﬁnition — the difference between the maximum price a consumer is willing and able to pay for a product and the actual price • The surplus, measurable in dollar terms, reﬂects the extra extra utility gained from paying a lower price than what is required to obtain the good • Maximum price a consumer is willing and able to pay depends on the opportunity cost of goods and services they must forgo • Consumer surplus can be measured by calculating the difference between maximum price willing to pay and the actual price for each consumer, and then sum them • Consumer surplus is measured and represented graphically by the area under the demand curve and above the equilibrium price • Consumer surplus and price are inversely related — all else equal, a higher price reduces consumer surplus - Produce Surplus • Deﬁnition — the difference between the actual price a producer receives and the minimum acceptable price • Producer surplus can be measured by calculating the difference between the minimum price and the actual price for each unit sold , and then summing those differences A producer’s minimum price is based on the marginal cost and the opportunity cost of using • resources to produce other goods • Producer surplus is measured and represented graphically by the area above the supply cure and below the equilibrium price • Producer surplus and price are directly related — all else equal, a higher price increases producer surplus Efﬁciency Revisited and Efﬁciency Losses - Efﬁciency is attained at equilibrium, where the combined consumer and producer surplus is at its maximum • Consumers receive utility up to their maximum willingness to pay, but only have to pay the equilibrium price • Producers receive the equilibrium price for each unit, but it only costs the minimum acceptable price to produce • Allocative efﬁciency occurs at quantity levels where 3 conditions exist: Market Failures: Public goods and Externalities - Marginal Beneﬁt = Marginal Cost - Maximum willingness to pay to pay = minimum acceptable price - Combined consumer and producer surplus is at the maximum - Efﬁciency (Deadweight) Losses • Under production reduces both consumer and producer surplus, and efﬁciency is lost because both buyer and sellers would be willing to exchange a higher quantity • Over production causes inefﬁciency because because past the equilibrium quantity it costs society more to produce the good than it is worth to the consumer in terms of willingness to pay Private Goods - Private goods are produced and sold in competitive markets, and have two characteristics: • Rivalry in consumption — when one person buys and consumes a good, it is unavailable to others • Excludability — sellers can restrict the beneﬁts to those who pay for the good - Market demand for private goods is found by horizontally summing the individual demand schedule - Private markets allocate goods and resources efﬁciently — those willing to pay to obtain goods - Unlike private goods, public goods are those goods that are non-rival and non-excludible - Public goods suffer from the free-rider problem, where a consumer can enjoy the beneﬁt of the good without having to pay for it • As a result the government must provide the good • Government doesn’t prevent free-riders, but government can ﬁnance production of the good through taxes • Sometimes public goods can be subsidized through private related goods and there for provided by private ﬁrms - Street performers • Regularly appear in popular tourist areas in major cities • Because businesses sometimes beneﬁt from the customers attracted businesses may pay the performers - The demand for a public good differs from the market demand for private goods • It is a ‘phantom’ demand • To ﬁnd the collective demand schedule for a public good, we add the prices people collectively are willing and able to pay - The supply curve for any good is its marginal cost curve - The optimal quantity of a public good can be determined by comparing the collect demand curve with the supply curve - Cost beneﬁt analysis is a technique got decision making in the public sector • The concept involves comparing the beneﬁt of providing good with the cost of providing additional • The rule for this decision-making technique is to use the marginal beneﬁt = Marginal cost rule • The problems with this is the difﬁculty measure the costs and beneﬁts - Quasi-Public goods are those that have large positive externalities , so government will sponsor their provision - Resources are reallocated from private to public use by levying taxes on households and businesses, thus reducing their purchasing power and using their proceeds for public and quasi-public goods Externalities Market Failures: Public goods and Externalities - Occur when costs of beneﬁts occur to an individual who is external to the market transaction • Negative externalities occur when producers are able to shift some of their costs to the public • Positive externalities occur when the beneﬁts of a good are received by others in the community - Direct Government controls or taxes may be needed to reduce negative externalities, or provide subsidies or government provision where positive externalities occur Direct controls place limits on the amount of the offensive activity that can be controlled • Speciﬁc taxes can be levied on polluters • • Subsidies and government provision suggest three options - Buyer may be subsidized - Producers could be subsidized so that costs are reduced, thus shifting the supply curve to the right - The government could provide the product as a public good - Society’s optimal amount of externality reduction is not necessarily total elimination • To determine the correct amount of negative externalities mc=mb • THe cost of reducing spillover costs increases with each unit of reduction
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