Download Chapter 30

Public Goods
Demand for a Public
Good
Optimal Amount of a
Public Good
Cost-Benefit Analysis
Spillover Costs and
Benefits
30
C HAPTE R
Market-Based
Approach to Spillover
Rights
Society’s Optimal
Amount of Externality
Reduction
Solid-Waste Disposal
and Recycling
Key Terms
Previous
Slide
End
Show
30 - 1
Next
Slide
Government
And
Market Failure
Copyright McGraw-Hill/Irwin, 2002
PUBLIC GOODS
Public Goods
Demand for a Public
Good
Optimal Amount of a
Public Good
Cost-Benefit Analysis
Spillover Costs and
Benefits
Market-Based
Approach to Spillover
Rights
Private Goods
Divisibility
Demand Curve is Horizontal Summation
Public Goods
Society’s Optimal
Amount of Externality
Reduction
Solid-Waste Disposal
and Recycling
Key Terms
Previous
Slide
End
Show
30 - 2
Next
Slide
Indivisible
Copyright McGraw-Hill/Irwin, 2002
DEMAND FOR A PUBLIC GOOD
Problems of Revealing Preferences
Public Goods
Demand for a Public
Good
Optimal Amount of a
Public Good
Cost-Benefit Analysis
Spillover Costs and
Benefits
Market-Based
Approach to Spillover
Rights
Society’s Optimal
Amount of Externality
Reduction
Solid-Waste Disposal
and Recycling
Quantity
1
Adams’
Willingness
to pay (price)
Exclusion Principle
does not apply
Key Terms
Previous
Slide
End
Show
30 - 3
Benson’s
Collective
Willingness Willingness
to pay (price) to pay (price)
Next
Slide
Copyright McGraw-Hill/Irwin, 2002
DEMAND FOR A PUBLIC GOOD
Problems of Revealing Preferences
Public Goods
Demand for a Public
Good
Optimal Amount of a
Public Good
Quantity
Adams’
Willingness
to pay (price)
1
$4
Cost-Benefit Analysis
Spillover Costs and
Benefits
Market-Based
Approach to Spillover
Rights
Society’s Optimal
Amount of Externality
Reduction
Solid-Waste Disposal
and Recycling
Key Terms
Previous
Slide
End
Show
30 - 4
Next
Slide
Copyright McGraw-Hill/Irwin, 2002
Benson’s
Collective
Willingness Willingness
to pay (price) to pay (price)
+ $5
= $9
DEMAND FOR A PUBLIC GOOD
Problems of Revealing Preferences
Public Goods
Demand for a Public
Good
Optimal Amount of a
Public Good
Quantity
Adams’
Willingness
to pay (price)
1
2
$4
3
Cost-Benefit Analysis
Spillover Costs and
Benefits
Market-Based
Approach to Spillover
Rights
Society’s Optimal
Amount of Externality
Reduction
Solid-Waste Disposal
and Recycling
Key Terms
Previous
Slide
End
Show
30 - 5
Next
Slide
Copyright McGraw-Hill/Irwin, 2002
Benson’s
Collective
Willingness Willingness
to pay (price) to pay (price)
+ $5
+ 4
= $9
= 7
DEMAND FOR A PUBLIC GOOD
Problems of Revealing Preferences
Public Goods
Demand for a Public
Good
Optimal Amount of a
Public Good
Quantity
Adams’
Willingness
to pay (price)
1
2
3
$4
3
2
Cost-Benefit Analysis
Spillover Costs and
Benefits
Market-Based
Approach to Spillover
Rights
Society’s Optimal
Amount of Externality
Reduction
Solid-Waste Disposal
and Recycling
Key Terms
Previous
Slide
End
Show
30 - 6
Next
Slide
Copyright McGraw-Hill/Irwin, 2002
Benson’s
Collective
Willingness Willingness
to pay (price) to pay (price)
+ $5
+ 4
+ 3
= $9
= 7
= 5
DEMAND FOR A PUBLIC GOOD
Problems of Revealing Preferences
Public Goods
Demand for a Public
Good
Optimal Amount of a
Public Good
Quantity
Adams’
Willingness
to pay (price)
1
2
3
4
$4
3
2
1
Cost-Benefit Analysis
Spillover Costs and
Benefits
Market-Based
Approach to Spillover
Rights
Society’s Optimal
Amount of Externality
Reduction
Solid-Waste Disposal
and Recycling
Key Terms
Previous
Slide
End
Show
30 - 7
Next
Slide
Copyright McGraw-Hill/Irwin, 2002
Benson’s
Collective
Willingness Willingness
to pay (price) to pay (price)
+ $5
+ 4
+ 3
+ 2
= $9
= 7
= 5
= 3
DEMAND FOR A PUBLIC GOOD
Problems of Revealing Preferences
Public Goods
Demand for a Public
Good
Optimal Amount of a
Public Good
Quantity
Adams’
Willingness
to pay (price)
1
2
3
4
5
$4
3
2
1
0
Cost-Benefit Analysis
Spillover Costs and
Benefits
Market-Based
Approach to Spillover
Rights
Society’s Optimal
Amount of Externality
Reduction
Solid-Waste Disposal
and Recycling
Key Terms
Previous
Slide
End
Show
30 - 8
Next
Slide
Copyright McGraw-Hill/Irwin, 2002
Benson’s
Collective
Willingness Willingness
to pay (price) to pay (price)
+ $5
+ 4
+ 3
+ 2
+ 1
= $9
= 7
= 5
= 3
= 1
OPTIMAL AMOUNT OF A PUBLIC GOOD
P
Public Goods
Demand for a Public
Good
$9
Optimal Amount of a
Public Good
Cost-Benefit Analysis
Spillover Costs and
Benefits
Market-Based
Approach to Spillover
Rights
7
5
Adams’
willingness
to pay
Society’s Optimal
Amount of Externality
Reduction
Solid-Waste Disposal
and Recycling
3
Key Terms
Previous
Slide
End
Show
30 - 9
Next
Slide
1
D1
0
1
Copyright McGraw-Hill/Irwin, 2002
2
3
4
5
Q
OPTIMAL AMOUNT OF A PUBLIC GOOD
P
Public Goods
Demand for a Public
Good
$9
Optimal Amount of a
Public Good
Cost-Benefit Analysis
Spillover Costs and
Benefits
Market-Based
Approach to Spillover
Rights
Benson’s
willingness
to pay
7
5
Society’s Optimal
Amount of Externality
Reduction
Solid-Waste Disposal
and Recycling
3
Key Terms
Previous
Slide
End
Show
30 - 10
Next
Slide
D2
D1
1
0
1
Copyright McGraw-Hill/Irwin, 2002
2
3
4
5
Q
Public Goods
Demand for a Public
Good
Optimal Amount of a
Public Good
Cost-Benefit Analysis
Spillover Costs and
Benefits
Market-Based
Approach to Spillover
Rights
OPTIMAL AMOUNT OF A PUBLIC GOOD
P
When vertically
$9
added equals
collective
7
willingness
to pay
5
Society’s Optimal
Amount of Externality
Reduction
Solid-Waste Disposal
and Recycling
3
Key Terms
Previous
Slide
End
Show
30 - 11
Next
Slide
D2
D1
1
0
1
Copyright McGraw-Hill/Irwin, 2002
2
3
4
DC
5
Q
OPTIMAL AMOUNT OF A PUBLIC GOOD
P
Public Goods
Demand for a Public
Good
$9
S
Optimal Amount of a
Public Good
Cost-Benefit Analysis
Spillover Costs and
Benefits
Market-Based
Approach to Spillover
Rights
7
The public good’s
marginal Cost
as shown by S
5
Society’s Optimal
Amount of Externality
Reduction
Solid-Waste Disposal
and Recycling
3
Key Terms
Previous
Slide
End
Show
30 - 12
Next
Slide
DC
1
0
1
Copyright McGraw-Hill/Irwin, 2002
2
3
4
5
Q
OPTIMAL AMOUNT OF A PUBLIC GOOD
P
Public Goods
Demand for a Public
Good
$9
S
Optimal Amount of a
Public Good
Cost-Benefit Analysis
Spillover Costs and
Benefits
Market-Based
Approach to Spillover
Rights
Yields the
optimum amount
of the public good
7
5
Society’s Optimal
Amount of Externality
Reduction
Solid-Waste Disposal
and Recycling
MB = MC
3
Key Terms
Previous
Slide
End
Show
30 - 13
Next
Slide
DC
1
0
1
Copyright McGraw-Hill/Irwin, 2002
2
3
4
5
Q
COST-BENEFIT ANALYSIS
Public Goods
Demand for a Public
Good
Optimal Amount of a
Public Good
Cost-Benefit Analysis
Spillover Costs and
Benefits
Market-Based
Approach to Spillover
Rights
Society’s Optimal
Amount of Externality
Reduction
Marginal Cost = Marginal Benefit Rule
Externalities
Spillover Costs
Overallocation
Solid-Waste Disposal
and Recycling
Key Terms
Previous
Slide
End
Show
30 - 14
Next
Slide
Spillover Benefits
Underallocation
Copyright McGraw-Hill/Irwin, 2002
SPILLOVER COSTS AND BENEFITS
P
Public Goods
Demand for a Public
Good
St
Spillover
costs
Optimal Amount of a
Public Good
S
Cost-Benefit Analysis
Spillover Costs and
Benefits
Market-Based
Approach to Spillover
Rights
Society’s Optimal
Amount of Externality
Reduction
Solid-Waste Disposal
and Recycling
Key Terms
Previous
Slide
End
Show
30 - 15
Overallocation
Next
Slide
0
Copyright McGraw-Hill/Irwin, 2002
Q0
Qe
D
Q
SPILLOVER COSTS AND BENEFITS
P
St
Public Goods
Demand for a Public
Good
Optimal Amount of a
Public Good
Spillover
Benefits
Cost-Benefit Analysis
Spillover Costs and
Benefits
Market-Based
Approach to Spillover
Rights
Society’s Optimal
Amount of Externality
Reduction
Dt
Solid-Waste Disposal
and Recycling
Key Terms
Previous
Slide
End
Show
30 - 16
Underallocation
Next
Slide
0
Copyright McGraw-Hill/Irwin, 2002
Qe
Q0
D
Q
SPILLOVER COSTS AND BENEFITS
Public Goods
Demand for a Public
Good
Optimal Amount of a
Public Good
Cost-Benefit Analysis
Spillover Costs and
Benefits
Market-Based
Approach to Spillover
Rights
Society’s Optimal
Amount of Externality
Reduction
Solid-Waste Disposal
and Recycling
Key Terms
Previous
Slide
End
Show
30 - 17
Next
Slide
Individual Bargaining
Coase Theorem
Liability Rules and Lawsuits
Government Intervention
Direct Controls
Specific Taxes
Subsidies and
Government Provision
Copyright McGraw-Hill/Irwin, 2002
CORRECTING SPILLOVER COSTS
P
Public Goods
Demand for a Public
Good
St
Spillover
costs
Optimal Amount of a
Public Good
S
Cost-Benefit Analysis
Spillover Costs and
Benefits
Market-Based
Approach to Spillover
Rights
Society’s Optimal
Amount of Externality
Reduction
Solid-Waste Disposal
and Recycling
TAX
Key Terms
Previous
Slide
End
Show
30 - 18
Overallocation
Corrected
Next
Slide
0
Copyright McGraw-Hill/Irwin, 2002
Q0
Qe
D
Q
CORRECTING SPILLOVER BENFITS
P
Public Goods
Demand for a Public
Good
S
Optimal Amount of a
Public Good
Cost-Benefit Analysis
Spillover Costs and
Benefits
Spillover
Benefits
Market-Based
Approach to Spillover
Rights
Society’s Optimal
Amount of Externality
Reduction
Dt
Solid-Waste Disposal
and Recycling
Key Terms
D
Underallocation
Previous
Slide
End
Show
30 - 19
Next
Slide
0
Copyright McGraw-Hill/Irwin, 2002
Qe
Q0
Q
CORRECTING SPILLOVER BENFITS
P Correcting by Subsidy to Consumers
Public Goods
Demand for a Public
Good
S
Optimal Amount of a
Public Good
Cost-Benefit Analysis
Subsidy to
consumer
increases
demand
Spillover Costs and
Benefits
Market-Based
Approach to Spillover
Rights
Society’s Optimal
Amount of Externality
Reduction
Dt
Solid-Waste Disposal
and Recycling
Key Terms
Previous
Slide
End
Show
30 - 20
D
Underallocation
Corrected
Next
Slide
0
Copyright McGraw-Hill/Irwin, 2002
Qe
Q0
Q
CORRECTING SPILLOVER BENFITS
Public Goods
Demand for a Public
Good
P Correcting by Subsidy to Producers
St
Subsidy to
producers
increases
supply
Optimal Amount of a
Public Good
Cost-Benefit Analysis
S’t
Spillover Costs and
Benefits
Market-Based
Approach to Spillover
Rights
Society’s Optimal
Amount of Externality
Reduction
Solid-Waste Disposal
and Recycling
Key Terms
Previous
Slide
End
Show
30 - 21
Underallocation
Corrected
Next
Slide
0
Copyright McGraw-Hill/Irwin, 2002
Qe
Q0
D
Q
Demand for a Public
Good
Optimal Amount of a
Public Good
Cost-Benefit Analysis
Spillover Costs and
Benefits
Market-Based
Approach to Spillover
Rights
Society’s Optimal
Amount of Externality
Reduction
Solid-Waste Disposal
and Recycling
Key Terms
Previous
Slide
End
Show
30 - 22
Next
Slide
Price per pollution right
Public Goods
A MARKET-BASED APPROACH
TO SPILLOVER COSTS
The Tragedy of the Commons
A Market for Externality Rights
•Operation of the Market
•Advantages
S = Supply of
pollution
rights
D 2002
$200
$100
D 2012
500
750
1000
Quantity of pollution rights
Copyright McGraw-Hill/Irwin, 2002
SOCIETY’S OPTIMAL AMOUNT
OF EXTERNALITY REDUCTION
Public Goods
Demand for a Public
Good
Optimal Amount of a
Public Good
Cost-Benefit Analysis
Spillover Costs and
Benefits
Market-Based
Approach to Spillover
Rights
Society’s Optimal
Amount of Externality
Reduction
Solid-Waste Disposal
and Recycling
End
Show
30 - 23
MC – MB Equilibrium
Optimal Reduction of an
Externality
Shifts in the Curves
Key Terms
Previous
Slide
Application of MC = MB Rule
Graphically…
Next
Slide
Copyright McGraw-Hill/Irwin, 2002
Public Goods
Demand for a Public
Good
Optimal Amount of a
Public Good
Cost-Benefit Analysis
Spillover Costs and
Benefits
Market-Based
Approach to Spillover
Rights
Society’s Optimal
Amount of Externality
Reduction
Solid-Waste Disposal
and Recycling
Key Terms
Previous
Slide
End
Show
30 - 24
Next
Slide
Society’s marginal benefit and marginal
cost of pollution abatement
SOCIETY’S OPTIMAL AMOUNT
OF EXTERNALITY REDUCTION
MC
Socially optimum
amount of
pollution
abatement
MB
0
Q1
Amount of pollution abatement
Copyright McGraw-Hill/Irwin, 2002
Public Goods
Demand for a Public
Good
Optimal Amount of a
Public Good
Cost-Benefit Analysis
Spillover Costs and
Benefits
Market-Based
Approach to Spillover
Rights
Society’s Optimal
Amount of Externality
Reduction
Solid-Waste Disposal
and Recycling
Key Terms
Previous
Slide
End
Show
30 - 25
Next
Slide
SOLID-WASTE DISPOSAL
AND RECYCLING
The Law of Conservation of
Matter and Energy
Market for Recyclable
Inputs
Policy
•Demand Incentives
•Supply Incentives
Global Warming Theory
Copyright McGraw-Hill/Irwin, 2002
Public Goods
Demand for a Public
Good
Optimal Amount of a
Public Good
Cost-Benefit Analysis
Spillover Costs and
Benefits
Market-Based
Approach to Spillover
Rights
Society’s Optimal
Amount of Externality
Reduction
Solid-Waste Disposal
and Recycling
Key Terms
Previous
Slide
End
Show
30 - 26
Next
Slide
SOLID-WASTE DISPOSAL
AND RECYCLING
Information Failures
Asymmetric Information
Inadequate information about sellers
Inadequate information about buyers
Moral Hazard Problem
Adverse Selection Problem
•Workplace Safety
Copyright McGraw-Hill/Irwin, 2002
Chapter Conclusions
Public Goods
Demand for a Public
Good
Optimal Amount of a
Public Good
Cost-Benefit Analysis
Spillover Costs and
Benefits
Market-Based
Approach to Spillover
Rights
Society’s Optimal
Amount of Externality
Reduction
Solid-Waste Disposal
and Recycling
Key Terms
Previous
Slide
End
Show
30 - 27
Next
Slide
Copyright McGraw-Hill/Irwin, 2002
cost-benefit analysis
Marginal-cost – marginal-benefit rule
externalities
Coase theorem
tragedy of the commons
market for externality rights
optimal reduction of an externality
law of conservation of matter and energy
asymmetric information
moral hazard problem
adverse selection problem
Copyright McGraw-Hill/Irwin 2002
BACK
END
Public Goods
Demand for a Public
Good
Optimal Amount of a
Public Good
Cost-Benefit Analysis
Spillover Costs and
Benefits
Market-Based
Approach to Spillover
Rights
Society’s Optimal
Amount of Externality
Reduction
Solid-Waste Disposal
and Recycling
Key Terms
Previous
Slide
End
Show
30 - 29
Next
Slide
Public Choice Theory
And
The Economics of Taxation
Chapter 31
Copyright McGraw-Hill/Irwin, 2002