Market Failures: Public Goods and Externalities Chapter 5 Market Failures: Public Goods and Externalities Graphs and Tables Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Our Focus Demand-side market failure: when the demand curve does not reflect consumers’ full willingness to pay for a good or service. Example: fireworks display

Public vs. Private Goods A good is rival when one person’s consumption of a product makes it unavailable for another to buy and consume. Examples: apples, pants, bottle of soda, fish in the ocean Nonrivalry means that everyone can simultaneously enjoy the benefit from a good. Examples: National Defense, street lighting, broadcast TV

Public vs. Private Goods A good is excludable when producers can ensure that only buyers receive the benefit. Examples: DVD player, cell phone service, attending a concert, satellite TV Nonexcludability means there is no effective way of excluding anyone from the benefit of a good. Examples: disease vaccinations, clean air, shared mp3s?

Public vs. Private Goods Private goods are goods that are both rival and excludable. Public Goods are goods that are both non-rival and non-excludable. Wikipedia Link

Public Goods Free-rider problem: once a public good has been provided or supplied, everyone (including non-buyers) receives the benefit. When the incentive to free-ride is strong, there is too little Demand – the Demand curve does not reflect the full willingness to pay.

Public Goods. →Markets under-provide public goods. →Thus, the government usually provides public goods.

Public Goods: An Exception Quasi-public goods: exclusion may be possible and private firms may profit Examples: Roads, fire and ambulance service (link), and museums

Reallocation Process For the government to produce more public goods, resources must be reallocated away from private goods. How? TAXES!