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Externalities, Asymmetric Information, and Government Intervention. Chapter 16 Government and Market Failure. Private goods . Private goods are rivalous and excludable Both features must be present

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externalities asymmetric information and government intervention

Externalities, Asymmetric Information, and Government Intervention

Chapter 16

Government and Market Failure

private goods
Private goods
  • Private goods are rivalous and excludable
  • Both features must be present
  • Rivalry means when someone buys and consumes a good, they prevent anyone else from buying and consuming that good
  • Excludability means the seller can exclude non-payers from enjoying the product
  • These characteristics are not found for public goods—their absence makes it impossible for private providers to profit from offering these products
public goods
Public goods
  • Public goods are nonrivalous and nonexcludable
  • Nonrivalry means that more than one person can consume the same good at the same time
  • Watching a ballgame is a nonrivalrous good, though particular seats in a ballbark are rivalous. Ballgames are provided privately because they are excludable.
  • Nonexcludability means that the good’s benefits cannot be limited to those who pay for it
the free rider problem
The free rider problem
  • If consumers can enjoy satisfaction from a nonrivalous good, and cannot be excluded from using it even when they don’t pay….
  • There’s no incentive to pay for the good if it is offered on the market,
  • And there’s no incentive for private agents to offer it for sale….
  • So it must be provided by the government or not at all.
optimal amount of a public good
Optimal amount of a public good
  • The optimal amount is determined by the collective willingness to pay, the vertical sum of the prices for a given quantity (marginal social benefit)
  • And the intersection with the marginal cost
cost benefit analysis
Cost-benefit analysis
  • Net benefit = marginal benefit – marginal cost
  • NB = MB – MC
  • Determines the socially optimal quantity
externalities
Externalities
  • aka “spillover” costs and benefits
  • Negative externalities (external costs) result in a lower production cost being borne by the producer and being passed onto consumers
  • Creates an overallocation of resources—producers produce too much
  • Positive externalities (external benefits) result in more satisfaction being received by consumers than producers can charge for
  • Results in underallocation of resources—producers produce too little
the coase theorem
The Coase theorem
  • Market processes can internalize all costs and benefits, provided
    • A. Property rights are well understood, enforced, and mutually agreed on,
    • B. The number of independent negotiating agents is small, and
    • C. Transaction costs, including costs of bargaining, are small enough to be negligible.
  • Too many participants or too high transaction costs make a private solution unworkable.
information asymmetries
Information asymmetries
  • Only producers know their marginal costs, and only consumers know their own marginal benefits
  • Used car dealers know whether the car is a lemon
  • Buyers find out later
  • Results in a market solution that all used cars are worth significantly less than new cars
external benefits
External benefits
  • Lojack and other car antitheft devices lower car theft, even of cars without them
  • Local crackdowns on chopshops reduce theft
  • Crackdowns on traffickers in stolen car audio equipment yield even better benefits
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