Download AP Micro 6-2 Public Goods (cont)

Unit 6:
Market Failures and the
Role of the Government
1
Review
1. List the characteristics of the Free Market.
2. Define Market Failure.
3. What is the “invisible hand”?
4. List the 4 Market Failures.
5. Why must the government provide public
goods?
6. Define Free Rider.
7. What is wrong with having free riders?
8. List 10 streets in Pasadena.
2
Market Failure #1
PUBLIC GOODS
Why doesn’t the free market
provide them?
There is little opportunity to earn
profit.
Why NOT?
Individuals benefit without paying.
3
How do we decide
how many public
goods we need?
4
Can the government…
1. Prevent the destruction of rain forest?
2. Ensure that no one ever speeds on the
freeway?
3. Create a research station on Mars?
4. Stop pollution from fossil fuels?
5. Completely stop illegal immigration?
6. Make sure everyone in the US has a job?
YES! But the costs outweigh the benefits.
How does the government decide how
many public goods to provide?
How does the government determine what
quantity of public goods to produce?
They use Supply and Demand
Demand for Public GoodsThe Marginal Social Benefit of the good
determined by citizens willingness to pay.
Supply of Public GoodsThe Marginal Social Cost of providing
each additional quantity.
Marginal Social Benefit (MSB)
Marginal Private Benefit (MPB)
The benefit from an additional unit of a
good or service that the consumer
receives.
Marginal External Benefit (MEB)
The benefit from an additional unit of a
good or service that people other than the
consumer of the good or service enjoy.
MSB = MPB + MEB
Demand for a New Park
Marginal willingness to pay higher taxes
# of Parks
Adam is
willing to
pay
(MPB)
Jill is
willing to
pay
(MPB)
1
$4
$5
2
$3
$4
3
$2
$3
4
$1
$2
5
$0
$1
Assume:Marginal
Society’s
Demand
Cost
1. There are
only
for Parks
two people in
society.
$5
2.$9
Each additional
park costs
$7
$5$5
$5
$5
How many parks
should be$5
made?
$3
$1
$5
Demand for a New Park
Marginal willingness to pay higher taxes
# of
Parks
Adam is
willing to
pay
(MPB)
Jill is
willing to
pay
(MPB)
1
2
3
4
5
$4
$5
$3
$4
$2
$3
$1
$2
$0
$1
Society’s Marginal
Demand Cost per
(MSB)
Park
$9
$7
$5
$3
$1
$5
$5
$5
$5
$5
Marginal Social Benefit (MSB)
Marginal Private Benefit (MPB)
The benefit from an additional unit of a
good or service that the consumer
receives.
Marginal External Benefit (MEB)
The benefit from an additional unit of a
good or service that people other than the
consumer of the good or service enjoy.
MSB = MPB + MEB
Marginal Social Cost (MSC)
Marginal Private Cost (MPC)
The cost of producing an additional unit
of a good or service that is borne by the
producer.
Marginal External Benefit (MEC)
The cost of producing an additional unit
of a good or service that falls on people
other than the producer.
MSC = MPC + MEC
Demand for a New Park
Marginal willingness to pay higher taxes
# of
Parks
Adam is
willing to
pay
(MPB)
Jill is
willing to
pay
(MPB)
1
2
3
4
5
$4
$5
$3
$4
$2
$3
$1
$2
$0
$1
Society’s Marginal
Demand
Social
(MSB)
Cost
$9
$7
$5
$3
$1
$5
$5
$5
$5
$5
Supply and Demand for Public Parks
Price
The Demand is
the equal to the
marginal benefit
to society
$9
7
5
3
1
D=MSB
0
1
2
3
4
Quantity of Parks
5
Supply and Demand for Public Parks
1. What if the government
made 1 park?
2. What if the government
made 4 parks?
Price
$9
7
MSB = MSC
S=MSC
5
The supply is the
public good’s
marginal cost to
society
3
1
0
1
2
D=MSB
3
4
Quantity of Parks
5