6/13/2014CRC Microeconomics1

6/13/2014CRC Microeconomics2 What did you study last time? Chapter 9 Externalities Solutions

6/13/2014CRC Microeconomics3 Do you know … the special characteristics of goods? the different types of goods? the importance of private property rights? what public goods are? what common resources are?

6/13/2014CRC Microeconomics4 a. Excludability When one person uses a good/service, others are not able to use the same good/service. Only one person, often the owner, can use the good/service (due to private property rights). e.g. a car, a cone of ice cream, etc. 1. What are the special characteristics of goods/services?

6/13/2014CRC Microeconomics5 b. Nonexcludability The same good/service is available to all, i.e. everybody owns the good. e.g. police protection, the light, etc. 1. What are the special characteristics of goods/services?

6/13/2014CRC Microeconomics6 1. What are the special characteristics of goods/services? c. Rivalry When one person uses a good/service, there is less of it for others. e.g. a car, an apple, etc.

6/13/2014CRC Microeconomics7 1. What are the special characteristics of goods/services? d. Nonrivalry The same amount of the good/service is available to all. e.g. the light, police protection, etc.

6/13/2014CRC Microeconomics8 2. What are the different types of goods? a. Private goods Excludable + rival, e.g. an apple, a car, etc. b. Natural monopolies Excludable + nonrival, e.g. cable TV, etc.

6/13/2014CRC Microeconomics9 2. What are the different types of goods? c. Common resources Nonexcludable + rival, e.g. environment, etc. d. Public goods Nonexcludable + nonrival, e.g. national defense

6/13/2014CRC Microeconomics10 Summary Table Private Goods. Ice-cream cones. Clothing. Congested toll roads Natural Monopolies. Fire protection. Cable TV. Uncongested toll roads Common Resources. Fish in the ocean. The environment. Congested nontoll roads Public Goods. Tornado siren. National defense. Uncongested nontoll roads YesNo Rival in consumption? Yes No Excludable?

6/13/2014CRC Microeconomics11 3. Why are private property rights important? In all cases, the market fails to allocate resources efficiently because property rights are not well-established. i.e. some item of value does not have an owner with the legal authority to control it.

6/13/2014CRC Microeconomics12 3. Why are private property rights important? When the absence of property rights causes a market failure, the government can potentially solve the problem. e.g. sale of pollution permits, restriction on hunting seasons, etc.

6/13/2014CRC Microeconomics13 4. What are public goods? What is a public good? What is the main problem involving public goods? (The free-rider problem) Some examples of public goods How much should a public good be provided? (Cost-benefit analysis)

6/13/2014CRC Microeconomics14 a. What is a public good? A public good is a good that is neither excludable nor rival, e.g. firework displays e.g. Everyone can watch the same firework display.

6/13/2014CRC Microeconomics15 b. What is the main problem involving public goods? The free-rider problem Because public goods are not excludable, people have the incentive to be free riders. A free rider A person who receives the benefit of a good but avoids paying for it.

6/13/2014CRC Microeconomics16 b. What is the main problem involving public goods? The free-rider problem prevents private markets from supplying public goods. If the government decides that the total benefits exceed the costs, it can provide the public good and pay for it with tax revenue, making everyone better off.

6/13/2014CRC Microeconomics17 c. Some examples of public goods National defense $1,200 per person in 2002 (U.S.) Basic research NSF subsidizes basic research in many fields. Fighting poverty Temporary assistance to needy families, Food Stamp program, etc.

6/13/2014CRC Microeconomics18 d. How much should public goods be provided? The Cost-Benefit analysis A study that compares the total costs and benefits to society of providing a public good.

6/13/2014CRC Microeconomics19 d. How much should public goods be provided? The findings on the costs and benefits are rough approximation. It is difficult to assess such things as: - the value of life, consumers time, and aesthetics. - WTP and WTR.

6/13/2014CRC Microeconomics20 5. What are common resources? What is a common resource? What is the problem involving common resources? (The tragedy of the commons) Some important common resources

6/13/2014CRC Microeconomics21 a. What is a common resource? A common resource is a good that is non- excludable, and yet rival, e.g. air, fish in the ocean, etc. It is available free of charge to anyone who want to use it.

6/13/2014CRC Microeconomics22 b. What is the problem involving common resources? The tragedy of the commons. Common resources get used more than is desirable from the standpoint of society as a whole. When one person uses a common resource, s(h)e diminishes other people's enjoyment of it. Because of this negative externality, common resources tend to be used excessively.

6/13/2014CRC Microeconomics23 b. What is the problem involving common resources? The government can solve this problem through regulation or taxes, or can turn the common resource into a private good.

6/13/2014CRC Microeconomics24 c. Some examples of common resources Clean air and water Congested roads Oil pools and underground water Fish, whales, and wildlife

6/13/2014CRC Microeconomics25 Now you know … the special characteristics of goods. the different types of goods. the importance of private property rights. what public goods are. what common resources are.

6/13/2014CRC Microeconomics26 What will you study next time? Chapter 12 The Design of the Tax System What are the criteria of an efficient tax system? How to evaluate some tax systems? What are the principles used to achieve equity in a tax system?

6/13/2014CRC Microeconomics27