ECN 203 1st Edition Lecture 16 Outline of Last Lecture II Market Power a Naturally Occurring Market Power b Economies of Scale c Artificially Created Market Power i Rent Maintenance ii Rent Seeking Outline of Current Lecture III Public Goods a Pure Public Goods b The Problem IV Externalities a Source b As market failure c Negative and Positive Externalities d Building the Graph Current Lecture Lecture 2 23 15 Market Failure Public Goods o Pure Public Goods Non excludable provide it to anyone and you are providing it to everyone because no one can be excluded Non partitionable however much you provide to anyone is available to everyone you can t control the size of the shares Example military defense o If you re inside the defense perimeter the safety afforded by that perimeter is non excludable and non partionable So as long as you re inside that perimeter you re as safe as anyone else inside too These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute o Problem of Public Goods Since a public good is non excludable and non partitionable Once it s provided to anyone everyone else gets to enjoy all its benefits without having to pay for it This leads to a Free Rider Problem Free Rider the initial provider bears the full burden of the cost and no one else has to contribute since they can ride along No private individual or firm is going to provide under this condition so even if it s good for the public market won t meet that need o The Public Good Problem Externalities o Exists when property rights to resources are either not assigned or not enforceable o A positive or negative effect of a private activity on nominally uninvolved individuals o It is a cost or benefit that private individuals or firms don t take into account when making their activity decisions It is external to the concerns of these private actors and not part of their considerations as they make choices Source o Failure to assign or enforce property rights No market forms and so no market coordination signal is generated The missing signal is the price As market failure Due to failure to enforce property rights no market forms and so no price signal is generated to coordinated choices Private firms and individuals only consider their own costs or benefits when making decisions o An externality means they don t take into consideration the full costs or benefits of their choices on society Negative externalities Create external costs These are social costs that the firm doesn t take into account so they are external to the firm s decision making To measure the full social effect we add the external effect o o Positive externalities Create external benefits These are social benefits that the individual doesn t take into account so they are external to the firm s decision making To measure the full social effect we add the external effect o o Marginal Social Cost MSC MPS EC Marginal Social Benefit MSB MPB EB Building the Graph In the absence of externalities EC 0 so MSC MPC EB 0 so MSB MPB
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