1. Copyright 2011 The McGraw-Hill Companies 20-1 Public Goods Demand For Public Goods Cost-Benefit Analysis Externalities Global Warming Information Failures Last Word Key Terms End Show 20 Government and Market Failure

2. Copyright 2011 The McGraw-Hill Companies 20-2 Public Goods Demand For Public Goods Cost-Benefit Analysis Externalities Global Warming Information Failures Last Word Key Terms End Show Chapter Objectives How Public Goods are Distinguished from Private Goods The Method of Determining the Optimal Quantity of a Public Good The Basics of Cost-Benefit Analysis About Externalities (Spillover Costs and Benefits) and the Methods to Remedy Them How Information Failures Can Justify Government Interventions in Some Markets

3. Copyright 2011 The McGraw-Hill Companies 20-3 Public Goods Demand For Public Goods Cost-Benefit Analysis Externalities Global Warming Information Failures Last Word Key Terms End Show Public Goods Private Goods –Rivalry –Excludability Public Goods –Nonrivalry –Nonexcludability –Free-Rider Problem –Optimal Quantity of a Public Good 20.1

4. Copyright 2011 The McGraw-Hill Companies 20-4 Public Goods Demand For Public Goods Cost-Benefit Analysis Externalities Global Warming Information Failures Last Word Key Terms End Show Demand for Public Goods (1) Quantity Of Public Good (2) Jolandi’s’ Willingness To Pay (Price) (3) Ben’s Willingness To Pay (Price) (4) Collective Willingness To Pay (Price) 1234512345 R4 3 2 1 0 R5 4 3 2 1 R9 7 5 3 1 ++++++++++ ========== Two Individuals Graphically…

5. Copyright 2011 The McGraw-Hill Companies 20-5 Public Goods Demand For Public Goods Cost-Benefit Analysis Externalities Global Warming Information Failures Last Word Key Terms End Show Demand for Public Goods R9 7 5 3 1 0 P Q 12345 R6 5 4 3 2 1 0 P Q 12345 R6 5 4 3 2 1 0 P Q 12345 Jolandi Ben Collective Demand and Supply D1D1 D2D2 DCDC S Jolandi’s Demand Ben’s Demand Collective Demand R3 for 2 Items R4 for 2 Items R7 for 2 Items R1 for 4 Items R2 for 4 Items R3 for 4 Items Connect the Dots Collective Willingness To Pay Optimal Quantity Comparing MB and MC

6. Copyright 2011 The McGraw-Hill Companies 20-6 Public Goods Demand For Public Goods Cost-Benefit Analysis Externalities Global Warming Information Failures Last Word Key Terms End Show Cost-Benefit Analysis Concept Marginal-Cost-Marginal- Benefit Rule

7. Copyright 2011 The McGraw-Hill Companies 20-7 Public Goods Demand For Public Goods Cost-Benefit Analysis Externalities Global Warming Information Failures Last Word Key Terms End Show Externalities Negative Externalities Positive Externalities 0 D S StSt Overallocation Negative Externalities StSt Underallocation Positive Externalities QoQo QoQo QeQe QeQe P P 0 Q Q Individual Bargaining: Coase Theorem –Limitations Liability Rules and Lawsuits D DtDt 20.1 20.2

8. Copyright 2011 The McGraw-Hill Companies 20-8 Public Goods Demand For Public Goods Cost-Benefit Analysis Externalities Global Warming Information Failures Last Word Key Terms End Show Externalities Government Intervention –Direct Controls –Specific Taxes –Subsidies and Government Provision Subsidies to Buyers Subsidies to Producers A Market-Based Approach –The Tragedy of the Commons –A Market for Externality Rights

9. Copyright 2011 The McGraw-Hill Companies 20-9 Public Goods Demand For Public Goods Cost-Benefit Analysis Externalities Global Warming Information Failures Last Word Key Terms End Show Externalities Operation of the Market –Advantages –Real-World Examples D 2006 D 2016 S=Supply of Pollution Rights 500 750 1000 R100 R200 P 0 Q Price Per Pollution Right Quantity of 1-Ton Pollution Rights

10. Copyright 2011 The McGraw-Hill Companies 20-10 Public Goods Demand For Public Goods Cost-Benefit Analysis Externalities Global Warming Information Failures Last Word Key Terms End Show Externalities Society’s Optimal Amount of Externality Reduction –MC, MB, and Equilibrium 0 Society’s Marginal Benefit and Marginal Cost of Pollution Abatement (Dollars) Q1Q1 MB MC Socially Optimum Amount Of Pollution Abatement

11. Copyright 2011 The McGraw-Hill Companies 20-11 Public Goods Demand For Public Goods Cost-Benefit Analysis Externalities Global Warming Information Failures Last Word Key Terms End Show Carbon-Dioxide Emissions, Tons Per Capita, in Africa and Selected OECD Nations

12. Copyright 2011 The McGraw-Hill Companies 20-12 Public Goods Demand For Public Goods Cost-Benefit Analysis Externalities Global Warming Information Failures Last Word Key Terms End Show Information Failures Asymmetric Information Inadequate Information Involving Sellers –Example: Gasoline Market –Example: Licensing of Surgeons Inadequate Information Involving Buyers –Moral Hazard Problem –Adverse Selection Problem –Workplace Safety Qualification 20.3

13. Copyright 2011 The McGraw-Hill Companies 20-13 Public Goods Demand For Public Goods Cost-Benefit Analysis Externalities Global Warming Information Failures Last Word Key Terms End Show Satellite Tracking: A Case of Positive Externalities Some Redistribute Rather than Reduce Crime Sattellite tracking Car Recoveries are much higher than others Locates and Stops Chop Shops Underallocation Result Subsidize Consumer Purchase with Lower Insurance Rates Discounts too small to Offset Under allocation Last Word

14. Copyright 2011 The McGraw-Hill Companies 20-14 Public Goods Demand For Public Goods Cost-Benefit Analysis Externalities Global Warming Information Failures Last Word Key Terms End Show Key Terms private goods public goods free-rider problem cost-benefit analysiscost-benefit analysis marginal-cost- marginal-benefit- rulemarginal-cost- marginal-benefit- rule externalities Coase theorem tragedy of the commonstragedy of the commons market for externality rightsmarket for externality rights optimum reduction of an externalityoptimum reduction of an externality asymmetric informationasymmetric information moral hazard problemmoral hazard problem adverse selection problemadverse selection problem

15. Copyright 2011 The McGraw-Hill Companies 20-15 Public Goods Demand For Public Goods Cost-Benefit Analysis Externalities Global Warming Information Failures Last Word Key Terms End Show Next Chapter Preview… Fiscal Policy, Deficits and Debt