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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 ... 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... receiving goods and services • • • • Positive externalities Negative externalities Technological actions Pecuniary actions • • Pigouvian taxes and subsidies Regulation – Command -and- control... consumers is Pareto-inefficient • Non-excludablility Characteristic Public goods Private goods Property rights Non-excludable Excludable Consumption Non-rival Rival Aggregate demand curve Vertical