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public goods and externalities (possible solutions to the externality…
public goods and externalities
definition of private goods
rivalry in consumption
excitability
this forces consumers to reveal their preferences
MU = MC
pg40
public goods
non-rivalry
MC and the cost of admitting one extra is zero
excluding any one is Pareto inefficient
non-excludable
it is morel likely to be done by basis of cost
the market for public goods pg43
equation
who should supply public goods!
free riding
Price discrimination (charging different consumers different amounts).
the mandatory nature of taxes eliminates free riding.
P = MC (private firms cannot charge 0)
mixed and merit goods
mixed
have characteristics of both private and public goods
non-rivleus, excludable mixed goods
Rivalrus, non-excludable mixed goods
merit goods
positive externalities
externalities
supply side
negative MEC > 0 MSC > MPC
positive MEC < 0 MPC > MSC
demand side
negative MEB < 0 MPB > MSB
positive external MEB > 0 MSB > MPB
types
positive
negative
technological
pecuniary
negative production externality
49 and 50
positive consumption externaty
51
possible solutions to the externality problem
pigouvian taxes and subsidies
taxes
could be levied on each unit of externality (emission fee)
takes into count the MSC and taxes that.
ad valorem tax
an attempt to internalize externalities, to force parties to include the external effects of their actions in their own cost/benefit calculations
subsidies
takes into account the MSB
direct regulation
the restriction of harmful goods (is often used as a means of supplementing pigouvian taxes
demand and control regulation
go arounds (trafficking)
creation of regulated markets
total amount of pollutants
support for alternative markets
legal solution: property rights
property rights represent who owns the land, if this is well defined then they can be exchanged on a voluntary basis by means of a straightforward market transaction.
coase theorem: holds that market incentives will generate ea mutually beneficial exchange of property rights through which externalities can be fully internalized
well deinde property rights
zero transaction costs
global public merit goods