1 of 21 Principles of MicroEconomics: Econ102

 Provide the Rules  Contract Law  Tort Law  Corporation Law  Private Property Rights  Promote or Maintain Competition  Antitrust Laws: Sherman Act, Clayton Act  Provide Information  The Fallacy of Composition  Merit Goods  Redistribution of Income  Provide Public Goods  Correct for Externalities  Negative  Positive 2 of 21

3 of 21  Private good: A good that is both rival and excludable.  Public good: A good that is both non-rivalrous, non-excludable and collective.  Free riding: Benefiting from a good without paying for it………….freeloader, freerider  Quasi-public goods: Goods that are excludable but not rival.  Common resource: A good that is rival but not excludable.

4 of 21 Rivalry: The situation that occurs when one person’s consuming a unit of a good means no one else can consume it. Excludability: The situation in which anyone who does not pay for a good cannot consume it.

5 of 21

6 of 21 …………because the market itself fails to provide what consumers desire. Only the government has the legal power to force people to pay.

7 of 21 Externality: A benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service. Negative Externality: A situation where external costs are borne by someone who is not directly involved in the production of a good or service. Positive Externality: A situation where external benefits accrue to someone who is not directly involved in the consumption of a good or service.

8 of 21 Externalities May Result in Market Failure Market failure: A situation in which the market fails to produce the efficient level of output. What Causes Externalities? Property rights: The rights individuals or businesses have to the exclusive use of their property, including the right to buy or sell it.

9 of 21 Private cost: The cost borne by the producer of a good or service. Social cost: The total cost of producing a good, including both the private cost and any external cost. Private benefit: The benefit received by the consumer of a good or service. Social benefit: The total benefit from consuming a good or service, including both the private benefit and any external benefit. The Effect of Externalities

The Effect of Pollution on Economic Efficiency When there Is a Negative Externality, there is an overproduction of the good, and therefore an over-allocation of resources 10 of 21

When there Is a Negative Externality, the following will correct for the market failure:  Individual Bargaining  Liability Rules & Lawsuits  Tax on Producers  Pigovian Tax  Direct Controls  Market-Based Approaches  Market for externality rights 11 of 21

The Effect of a Positive Externality on Efficiency When there Is a Positive Externality, there is an underproduction of the good, and therefore an under- allocation of resources 12 of 21

When There Is a Positive Externality, a Subsidy Can Bring about the Efficient Level of Output When there Is a Positive Externality, the following will correct for the market failure:  Individual Bargaining  Subsidy to Consumers  Subsidy to Producers  Government Provision 13 of 21

14 of 21 Principles of MicroEconomics: Econ102

15 of 21 Utility: The enjoyment or satisfaction that people receive from consuming goods and services. Marginal utility: The additional utility a person receives from consuming one additional unit of a good or service. It is an important concept in understanding why a given product has the market value that it does…….refer to diamond-water paradox. Law of diminishing marginal utility: Consumers experience diminishing additional satisfaction as they consume more of a good or service during a given period of time.

16 of 21 For nearly every good or service, the more you consume during a period of time, the less you increase your total satisfaction from each additional unit you consume. Total Utility from Eating Pizza and Drinking Coke NUMBER OF SLICES OF PIZZA TOTAL UTILITY FROM EATING PIZZA MARGINAL UTILITY FROM THE LAST SLICE NUMBER OF CUPS OF COKE TOTAL UTILITY FROM DRINKING COKE MARGINAL UTILITY FROM THE LAST CUP

17 of 21 Total and Marginal Utility from Eating Pizza on Super Bowl Sunday

18 of 21 ………..if it is true that you buy up to that unit at which the marginal benefit (utility) is equal to the price, and it is true that the marginal benefit (utility) diminishes as more of the product is bought, then the price must fall in order to induce you to buy the next unit…………….wow, that is so cool!! The Law of Diminishing Marginal Utility tells us that consumers will be willing to pay less for subsequent units of a good or service.

19 of 21 It is responsible for the development of The Law of Diminishing Marginal Utility. The value of a product in a market is determined by its marginal utility, not by its total utility. On the one hand, the value of water is not determined by the total value of all water on the planet. Instead, it is determined by the marginal utility of the very last gallon of water. On the other hand, the total value of all the diamonds on the planet is not as large as it is for water. However, the value of the last carat of a well-cut diamond is very high because there is so little of it.