1. ECONOMICS UNIT #1 BASIC ECONOMIC REASONING
Lecture #4:
Goods, Market Failure,
Role of Government

2. THE DIFFERENT KINDS OF GOODS
Goods can be grouped by two properties
Excludable means a person can be prevented from using a good.
Rival means one person’s use of a good diminishes other people’s use.

3. Figure 1 Four Types of Goods
Rival?
Yes No
Private Goods
Natural Monopolies •
Ice-cream cones
Clothing
Congested toll roads •
Cable TV
Uncongested toll roads
Yes
Excludable?
Common Resources
Public Goods •
Fish in the ocean
The environment
Congested nontoll roads •
Tornado siren
National defense
Uncongested non-toll roads No
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4. PUBLIC GOODS
Provided by the government with tax dollars when the private market can’t or won’t produce them
Some people will be free-riders: they will get the good without paying for it.

5. Tragedy of the Commons The Tragedy of the Commons
Common resources get used excessively when individuals don’t have to pay for them.

6. Why Isn’t the Cow Extinct?
Will the market protect me?
Private
Ownership and
the Profit
Motive!

7. MARKET FAILURES
A market failure is when the private market is unable to produce where MB=MC.

8. EXTERNALITIES https://www.youtube.com/watch?v=FBjFDtH-iZM
An externality occurs when a 3rd party is impacted by the production/consumption of a good or service.

9. EXTERNALITIES AND MARKET INEFFICIENCY
Negative Externalities
Automobile exhaust
Cigarette smoking
Barking dogs (loud pets)
Loud stereos in an apartment building

10. Negative externalities impose costs on 3rd party bystanders.
The cost to society is higher than the producer’s cost.
The socially optimal level of output is lower than the market output.
The government could tax the product to discourage production/consumption

11. EXTERNALITIES AND MARKET INEFFICIENCY
Positive Externalities
Immunizations
Restored historic buildings
Research into new technologies

12. Positive externalities provide benefits to 3rd party bystanders.
The socially optimal level of output is higher than the market output.
A subsidy to producers or consumers would get more produced and bought.

13. ReCap: THE DIFFERENT KINDS OF GOODS
Private Goods
Are both excludable and rival.
Public Goods
Are neither excludable nor rival.
Common Resources
Are rival but not excludable.
Natural Monopolies
Are excludable but not rival.

14. GOVERNMENT REGULATION
Government protects health, safety, and well-being of society by imposing rules and restrictions
Government acts in the public interest-concerns of the public as a whole
Businesses must follow rules to protect consumers and provide labeling to inform them

15. NEGATIVE EFFECTS OF REGULATION
Businesses claim that rules and regulations are costly to implement and result in higher prices, lower profits, and lower economic growth
They also claim it deters competition and also raises government spending to implement the programs

16. Market Structures/ Regulations

17. Productivity as a relationship of inputs and outputs
An input is something that goes into making a good. For example, to make a cookie, a bakery must have ingredients like flour and sugar that come from natural resources like wheat and sugar cane. The baker must have capital resources like ovens and mixers to process the cookie dough. The baker needs labor resources to run the machines and serve the customers. If the baker is the owner of the bakery, he himself is the entrepreneurial resources who must choose to take a risk and decide how best to run the business.

18. Inputs/outputs continued
An output is the amount of a good or service produced. In the case of the baker described above, the cookie is the output. The baker wants to produce the right amount of output at the right price so he can make a profit.

19. Increases in productivity occur when producers can produce more output with fewer inputs. This could occur because an entrepreneur finds ways to use his inputs more efficiently. Examples might be trying a different recipe that uses less sugar, rearranging the production line to be more efficient, having current labor resources specialize and become efficient at a task, reducing the amount of inputs that are wasted in the production process, adding new, more efficient machinery or technology, or finding ways to motivate labor resources to do their jobs better.