1. 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.

2. 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

3. 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

4. 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?

5. 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

6. 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.

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

8. 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

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