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

When you finish this chapter, you should: 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.

• 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

• 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

• Can all goods and services be supplied efficiently by

competitive markets?

– Revealing consumer preferences

– Production

– Competition

• Characteristics of private goods:

– Rivalry in consumption

– Excludability.

• Non rivalry

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

• 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

• 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

• Positive externalities

• Negative externalities

• Technological actions

• Pecuniary actions

• Pigouvian taxes and subsidies

• Regulation

– Command-and-control regulation – Bureaux of Standards

– Regulatory measures

• Creation of markets

– “Cap-and-trade” programme

• Property rights

– Coase theorem

– Transaction costs.

• Joint responsibility/shared burden by neighbouring

countries

– Defence systems

– Cross border road and rail networks

– Air and water pollution

– Carbon dioxide emissions

• Bilateral and multilateral agreements

• Regional trade agreements

• International agreements