Final Notes Public Goods Some goods and services cannot be efficiently provided in private markets Law Enforcement Markets can t provide these goods and services because they are nonexcludable Nonexcludability Good or service is nonexcludable if it is very difficult or costly to prevent people from enjoying its benefits Clean city streets urgent medical care in most societies o Necessary for the government to provide insurance or for the government to require people to buy insurance Consumers can obtain it without payment Will not be provided in unregulated private markets o Private firms will not produce nonexcludable goods or services but governments can finance their production with taxes Governments can sometimes create excludability and permit private producers to function Free Riders Consumers who obtain benefits without payment Consumers will not pay for something that they can obtain for free Nonrivalry in Consumption Most consumption is rivalrous Nonrivalry occurs when consumption does not use up the good Enjoying cleanliness doesn t use up the cleaniness Scarcity versus Nonrivalry Scarcity Refers to a positive opportunity cost of creating a good or service If the use or consumption of a scarce good is nonrivalrous then the scarce good remains available for other people to use or consume Unregulated private markets can not supply nonrivalrous goods efficiently o Governments help provide many nonrivalrous goods and services whether or not exclusion is possible Weather forecasting scientific research TV and radio law enforcement Public Goods Public Goods Goods that are nonexcludable and nonrivalrous Supplied most efficiently by governments or charitable organizations although private firms may be capable of producing them Common Goods Common Goods Nonexcludable goods that are rivalrous Use tends to be excessive and inefficient because of the tragedy of the commons Perfect and Imperfect Competition Perfect Competition One homogeneous product Many buyers and sellers Voluntary exchange Perfect information Rational self interested agents Competition is imperfect when one or more of these features don t apply Imperfect Competition Monopoly One dominant firm Duopoly Two dominant firms o Soft Drinks Coke and Pepsi Oligopoly A few firms o Automobile market Monopolistic Competition Many firms with differentiated products o Restaurants THESE FIRMS CAN RAISE ABOVE COMPETITIVE EQUILIBRIUM Imperfect Competition from Limited Information Adverse Selection Bad products or bad customers that cannot be identified Used cars Have hidden problems so buyers have low WTP and equilibrium prices are low so owners won t sell good cars market works poorly Moral Hazard Customers with unknown WTP buy too much when others are paying the bill Ex Health Insurance Buyers of health insurance tend to be less healthy than average adverse Insured people may see the doctor too often moral o Insurance companies respond with high and healthy people don t want to buy insurance market works poorly Imperfect competition in markets with less than voluntary exchange College textbooks and healthcare Imperfect competition in markets with irrational consumers Wishful thinking stupidity temptation o Can lead to high prices or inefficiency or both Market Power A firm has market power if it can raise its without losing all of its customers