MANAGERIAL ECONOMICS 12 th Edition By Mark Hirschey

Government in the Market Economy Chapter 19

Chapter 19 OVERVIEW   Externalities   Solving Externalities   Public Goods   Optimal Allocation of Social Resources   Benefit ‑ Cost Concepts   Benefit-Cost Criteria   Additional Methods for Improving Public Management   Regulatory Reform in the New Millennium   Health ‑ Care Reform

Chapter 19 KEY CONCEPTS   negative externality   positive externality   internalize the externality   Pigovian taxes   command-and-control regulation   public good   nonrival consumption   private good   rival consumption   nonexclusion concept   nonexclusionary   exclusion concept   common resources   tragedy of the commons   free ‑ rider problem   hidden preferences problem   Pareto satisfactory   Pareto optimal   potential Pareto improvement   marginal social costs   marginal external costs   marginal private costs   marginal social benefits   marginal private benefits   marginal external benefits   social rate of discount   social net present-value   benefit ‑ cost ratio analysis   social internal rate of return   cost ‑ effectiveness analysis   privatization

Externalities   Negative Externalities Air, noise, and water pollution are familiar negative externalities. Negative externalities cause overproduction because sellers do not consider all social costs.   Positive Externalities Education generates positive externalities. Positive externalities cause underproduction because sellers cannot reflect the full social value of production in the prices charged.

Solving Externalities   Government Solutions Taxes are often used to correct negative externalities. Government sometimes controls the effects of externalities by regulation.   Market Solutions Markets can provide effective penalties to moderate negative externalities. Markets can give incentives for the production of goods and services with positive externalities.

Public Goods   Rivalry and Exclusion Public goods are nonrival in consumption. Use by certain individuals does not reduce availability for others. Public goods tend to be nonexclusionary. It is often impossible to confine benefits to paying customers.   Free Riders and Hidden Preferences Free ‑ riders enjoy benefits at no cost. Hidden preferences can exist for public goods.

Optimal Allocation of Social Resources   Pareto Improvement If a public project makes at least one individual better off and no one worse off, then the project is Pareto satisfactory. When all such projects have been undertaken, the situation is deemed Pareto optimal.   Marginal Social Costs and Benefits Optimal allocation of social resources requires balancing marginal social costs and benefits. MSC = MSB at optimum.

Benefit ‑ Cost Methodology   Benefit-Cost Concepts Statement of objectives. Discussion of alternatives. Quantification of related costs and benefits. Selection of a criterion for acceptable project determination. Specification of an appropriate social discount rate.   Social Rate of Discount Determining the true cost of social capital is crucial.

Benefit-Cost Criteria   Social Net Present-Value Invest when SNPV > 0. Do not invest when SNPV < 0.   Benefit ‑ Cost Ratio Invest when B/C > 1. Do not invest when B/C < 1.   Internal Rate of Return Invest when SIRR > k. Do not invest when SIRR < k.

Additional Methods for Improving Public Management   Cost ‑ effectiveness Analysis Purpose is to determine how to best employ resources in a given social program. Useful when output is difficult to express in monetary terms.   Privatization Public ‑ sector resources are transferred to the private sector in the hope that the profit motive might spur higher product quality, better customer service, and lower costs.

Regulatory Reform in the New Millennium   Promoting Competition in Electric Power Generation Setbacks limit future potential.   Fostering Competition in Telecommunications Emerging competition battles larger rivals.   Reforming Environmental Regulation   Improving Regulation of Health and Safety

Health ‑ Care Reform   Managed Competition Uncontrolled increases in health ‑ care expenditures and a growing number of uninsured pose daunting challenge. Reforms seek to expand access to health insurance and improve health ‑ care services.   Outlook for Health ‑ care Reform Economic incentives help control costs, improve access, and give consumers the quality of healthcare that they want.