micro economics chapter 04

Chapter 4Market Failures: Public Goods and... Consumer Surpluswilling to pay for a good and what the consumer actually pays to their MB maximum price... Producer Surplusproducer receives

Chapter 4

Market Failures: Public Goods and

Efficiently Functioning Markets

willingness to pay

production

Consumer Surplus

willing to pay for a good and what the consumer actually pays

to their MB

maximum price

Consumer Surplus

Consumer Surplus

(1) Person

(2) Maximum Price Willing to Pay

(3) Actual Price (Equilibrium Price)

(4) Consumer Surplus

Producer Surplus

producer receives and the minimum price they would accept

MC of producing good

higher price

Producer Surplus

Producer Surplus

(1) Person

(2) Minimum Acceptable Price

(3) Actual Price (Equilibrium Price)

(4) Producer Surplus

Public Goods

Demand for Public Goods

Demand for a Public Good, Two Individuals

(1)

Quantity of

Public Good

(2) Adams’ Willingness to

Pay (Price)

(3) Benson’s Willingness to Pay (Price)

(4) Collective Willingness

Cost-Benefit Analysis

Cost-Benefit Analysis for a National Highway Construction Project (in Billions)

(1) Plan

(2) Total Cost of Project

(3) Marginal Cost

(4) Total Benefit

(5) Marginal Benefit

(6) Net Benefit (4) – (2)

A: Widen existing highways 4 $4 5 $5 1

B: New 2-lane highways 10 6 13 8 3

C: New 4-lane highways 18 8 23 10 5

D: New 6-lane highways 28 10 26 3 -2

Quasi-Public Goods

the market system

government provides them

The Reallocation Process

of public goods

• An externality is a cost or benefit accruing to a

third party external to the market transaction

• Positive externalities

• Too little is produced

• Demand-side market failures

• Negative externalities

• Too much is produced

Demand-Side Market Failures

consumers are willing to pay

little

Supply-Side Market Failures

of producing its output

reflected in supply

Government Intervention

Methods for Dealing with Externalities

Problem Resource Allocation Outcome Ways to Correct

Government’s Role in the

Economy