Unit 5 – Market Failure and the Role of Government Public Goods.

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Presentation transcript:

Unit 5 – Market Failure and the Role of Government Public Goods

What are the characteristics of Public Goods? 1.Nonrivalry: one person’s consumption of a public good does not prevent someone else from consuming it. 2. Nonexludability: Once a public good has been provided, the producer cannot prevent people that have not paid for it from receiving the benefits. This leads to the free rider problem. Examples? Note: There is a positive externality associated with public goods.

Deriving the Demand Curve for Public Goods. 1. To find the demand for a public good, add up all individuals’ marginal benefit (that is, the price they are willing to pay) at any given quantity.

Demand Lily+Natalie+Danny = Demand Public

Now suppose that Danny is the one who decides to puts on fireworks displays every summer. Here is the marginal cost data for fireworks displays: To your graph of public demand, add this marginal cost data and Danny’s private demand curve. Quantity1234 Marginal Cost $4.00$7.50$11.00$15.50

Demand Lily+Natalie+Danny = Demand Public MPC = MSC D Danny QDQD Q EF

Quantity (acres of land in park) Price (1000s of $) D Public MPC=MSC D Aubrey