Government and Market Failure

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Government and Market Failure
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• Private Goods
• Rivalry
• Excludability
• Public Goods
• Nonrivalry
• Nonexcludability

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Why not just ride for free Paul Feldman points
out that ticket and pass sales on TriMet cover
113 million of the cost of running the
transportation system (Letters, Dec. 31). It
seems then, that the next logical questions we
should ask are these How much does it cost to
design, print, sell and collect TriMet tickets?
Is it close to 113 million? If it is, then
perhaps TriMet should do away with ticket sales
and let passengers ride for free. LAUREL SHARMER
Monmouth Letter to the editor, Oregonian,
12/31/08
"Free" Rider Problem
http//www.capstone.org/img/fareless_square.gif
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"Free" Rider Problem
When the number of people willing to pay for the
good or service is not enough to cover the cost
of providing itthe market will not provide it!
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"Free" Rider Problem
Have you ever gone out to a restaurant with
a group of people and it comes time to split the
bill. What happens?
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Why do governments pay for mosquito spraying of
neighborhoods? Why isnt this privatized?
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Cost-Benefit Analysis

• Marginal-Cost-Marginal-Benefit Rule
• What are the costs of public
  spending?

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http//www.buckeyeinstitute.org/uploaded_images/Pi
g20measured.jpg
Economy in government does not mean minimization
of public spending. It means allocating
resources between the private and public sectors
and among public goods to achieve maximum net
benefit.
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Externalities
Negative Externalities
Positive Externalities
Negative Externalities
St
St
Positive Externalities
S
Dt
D
D
Overallocation
Underallocation
0
Qo
Qo
Qe
Qe

• Individual Bargaining Coase Theorem
• Limitations
• Liability Rules and Lawsuits

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Property rights of smoking have changed over the
years.
It used to be, Would you like a smoke?
Then it became, Do you mind if I smoke?
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Then it became, Thank you for not smoking.
Finally, an outright ban on smoking.
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Externalities

• Government Intervention
• Direct Controls
• Specific Taxes
• Subsidies and Government Provision
• Subsidies to Buyers
• Subsidies to Producers

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Externalities
http//ack2112oop.tripod.com/irresponsibility.jpg
The Tragedy of the Commons - resources held in
common, so no incentive to take care of the
resource -fallacy of composition, my input
is so small it is of no consequence
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Tragedy of the Commons
Where there is no clear ownership of rights to a
natural resource, the users of the resource are
likely to overexploit it.
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http//www.hallmarkkitchens.com/images/bathroom_re
model_potomac_2_001.jpg
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Public Property
http//flickr.com/photos/duesentrieb/33710162/
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Tragedy of the Commons
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Externalities

• Operation of the Market
• Advantages
• Real-World Examples

SSupply of Pollution Rights
D2016
D2006
200
100
500
750
1000
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Externalities

• Societys Optimal Amount of Externality Reduction
• MC, MB, and Equilibrium

MSC
MC
Socially Optimum Amount Of Pollution Abatement
Societys Marginal Benefit and Marginal Cost of
Pollution Abatement (Dollars)
MB
MSB
0
Q1
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Public or Private ProductionThe Guideline Is
the Same

• Government Production should take place when the
  marginal benefit exceeds the marginal cost.

• Private Production should take place when the
  marginal benefit exceeds the marginal cost

MB MC
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Global Warming
Carbon-Dioxide Emissions, Tons Per Capita,
Selected Nations 2004
0 5 10
15 20 25
United States Australia Canada Czech
Republic Germany Japan United Kingdom Italy Spain
France
19.8
17.0
16.2
11.8
10.3
9.2
8.8
7.4
7.2
6.2
Source OECD Environmental Data
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Information Failures

• Asymmetric Information
• Inadequate Information Involving Sellers
• Example Gasoline Market
• Example Licensing of Surgeons
• Inadequate Information Involving Buyers
• Moral Hazard Problem
• Insured drivers, medical malpractice, contracted
  athletes, FDIC
• Adverse Selection Problem
• insurance

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Negative Externality
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