Lecture Public economics (5th edition) - Chapter 3: Public goods and externalities

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Explain the effects of positive and negative
externalities with the aid of supply and demand
analysis
Discuss the policy options to correct for externalities
Discuss the relative importance of property rights
and transaction costs in market-based approaches to
dealing with the problem of externalities
Discuss cap-and-trade programmes
Provide examples of global or regional public goods
and consider some of the relevant policy
implications.


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Distinguish between private, public, mixed, and merit
goods
Derive the conditions for the optimal allocation of
private, public, and mixed goods with the aid of
supply and demand analysis
Explain why competitive markets fail to provide
public and mixed goods efficiently
Explain the distinction between the financing of
public goods and services and their physical
production
Explain the concept of an externality
Identify the main types of externalities.


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Can all goods and services be supplied efficiently by
competitive markets?
– Revealing consumer preferences
– Production
– Competition

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Characteristics of private goods:
– Rivalry in consumption
– Excludability.

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Non rivalry
– Marginal cost of adding consumers is zero
– Excluding consumers is Pareto-inefficient

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Non-excludablility.



Characteristic

Public goods

Private goods

Property rights

Non-excludable

Excludable

Consumption

Non-rival

Rival

Aggregate demand
curve

Vertical addition of
individual demand
curves

Horizontal addition of
individual demand
curves

Partial equilibrium
condition for optimum
provision

The sum of marginal
utilities equals
marginal cost

Marginal utility of each
consumer equals
marginal cost

Efficient pricing rule

The sum of individual
prices equals marginal
cost

Price equals marginal

cost


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Free riding
Perfect price discrimination vs taxation
Production of public goods
Financing of public goods.


Mixed goods
• Non-rival, excludable mixed goods and services
• Rival, non-excludable mixed goods and services
Merit goods
• External benefits to buying or receiving goods and
services.


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Positive externalities
Negative externalities
Technological actions

Pecuniary actions.




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Pigouvian taxes and subsidies
Regulation
– Command-and-control regulation
– Bureaux of Standards
– Regulatory measures

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Creation of markets
– “Cap-and-trade” programme

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Property rights
– Coase theorem
– Transaction costs.


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Joint responsibility/shared burden by neighbouring
countries

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Defence systems
Cross border road and rail networks
Air and water pollution
Carbon dioxide emissions

Bilateral and multilateral agreements
Regional trade agreements
International agreements.