Presentation 1

Fracking Video

Economic Rent The price paid for the use of land and other natural resources that are completely fixed in total supply

Different Interest Rates Discount Rate- the interest rate the Fed charges on loans made to banks (0.75%) Federal Funds Rate- interest rate that banks charge one another for overnight loans (.25%) Prime Interest Rate- the benchmark interest rate that banks use as a reference point for loans to individuals and firms (3% higher than the Fed Funds)

Private Goods A good or service that is individually consumed and that can be profitably provided by privately owned firms because they can exclude non-payers from receiving the benefits Ex- goods sold at stores or on the internet

Private Goods Cont’d Two characteristics: 1. Rivalry- when one person buys and consumes a product, it is not available for another person 2. Excludability- sellers can keep people who do not pay for a product from obtaining its benefits

Public Good A good or service provided by the government with 2 characteristics: 1. Non-rivalry- one person’s consumption of a good does not preclude consumption of the good by others 2. Non-excludability- there is no effective way of excluding individuals from the benefit of the good once it comes into existence

Free-Rider Problem Once a producer has provided a public good, everyone including non-payers can benefit Why pay when it’s for free?

Optimal Quantity of a Public Good The government uses surveys and public votes to estimate the demand for a public good They then compare the MB of an added unit of the good against the MC of providing it MB = MC Rule

Cost-Benefit Analysis A comparison of the marginal cost of a government project or program with the marginal benefits to decide whether or not to employ resources in that project/program and to what extent

Externalities A cost or benefit from production or consumption, without compensation to someone other than the buyers and sellers of the product “Spillover”

Positive Externality A benefit obtained without compensation by third parties for the production or consumption of buyers and sellers Spillover benefit Ex- a beekeeper benefits when a neighboring farmers plants clover Ex- Having people inoculated from disease

Positive Externality Cont’d When positive externalities occur the market demand curve lies to the left of the full-benefits demand curve (under-allocation) EX- people who don’t get sick due to others being inoculated

Negative Externalities A cost imposed without compensation on third parties by the production or consumption of sellers or buyers EX- manufacturer dumps toxic wastes into the river killing the fish population sought by fisherman

Negative Externalities Cont’d Supply is too high and the government may need to intervene Over-allocation of this commodity

Negative Externalities Positive Externalities 0 D S private S social Overallocation Negative Externalities StSt Underallocation Positive Externalities QoQo QoQo QeQe QeQe P P 0 Q Q D DtDt G 28.1

Subsidy to the Buyer for a Positive Externality

Subsidy to the Producer for a Positive Externality

Reducing a Negative Externality through Taxation

Coase Theorem U of Chicago Economist Ronald Coase Believed that the government isn’t needed to regulate external costs/benefits where: A. property ownership is clearly defined B. # of people involved is small C. bargaining costs are minimal **bargaining will allow acceptable solutions to the externality problems