Market failures: Public goods

Question 1

What is Coase theorem?

Answer 1

with stable property rights, externalities can be handled
If
transaction costs for a bargain not too high
Property rights are well-defined & enforced.
Coase theorem: If transaction costs are low+property rights clearly defined  private bargaining possible and will ensure efficient market equilibrium even if ther are externalities
Also, It is important that for bargaining to happen, the economic actors have to be clear. For example, I can bargain with my roommate about the externality they are causing but Coasian won’t work when the who is causing the externality and who is getting hurt is not clear.

Question 2

What type of good are the police?

Answer 2

Public

Question 3

Free riding is

Answer 3

Individually optimal, but it leads to outcomes that are not socially optimal.

Question 4

When companies can effectively prevent non-payers from consuming a product, that product is said to be

Answer 4

Excludable

Question 5

In competitive markets, public goods tend to be

Answer 5

Undersupplied due to the free rider problem

Question 6

Efficient private provision of pure public goods is difficult because

Answer 6

too little will be demanded as, individually, consumers choose not to pay the full cost of units of the good.

Question 7

Which is not measured by consumer surplus?

• The difference between what an individual is willing to pay and what she has to pay for a good
• How much extra of a good an individual consumes when the price falls
• The area under the (compensated) demand curve
• The value of a government project

Answer 7

How much extra of a good an individual consumes when the price falls

Question 8

Which is not true of Rawlsian social welfare functions?

• They have right-angled social indifference curves.
• They are derived from a concept of justice.
• They treat everyone equally.
• They focus attention on the least advantaged individual.

Answer 8

They treat everyone equally.
Rawlsian social welfare function is a social welfare function that uses as its measure of social welfare the utility of the worst-off member of society.

Question 9

Public goods

Answer 9

Pure public goods have the properties of perfectly non-rival consumption and non-excludability.
non-rival consumption not desirable to exclude anyone from the benefits  With private provision, there will be underconsumption and/ or undersupply.
non-excludability = not feasible to exclude anyone from the benefits  free rider problem
Such goods typically cannot be provided by the market, or will be undersupplied

Question 10

The role of exclusion. What lack of exclusion causes?

Answer 10

To determine the optimal level of production and to an appropriate division of costs we would need information about the individuals’ willingness to pay (individual demand curves)
Information not available directly
Lack of exclusion
Consumers either can’t be excluded from consumption…
…or the exclusion would be unreasonably expensive
If exclusion is impossible  price mechanism is not usefulpublic provision

Question 11

When are public goods Pareto efficient?

Answer 11

Pure public goods are efficiently supplied when the sum of the
marginal rates of substitution (over all individuals) is equal to the marginal
rate of transformation.
MRS- how much of the private good
all the members of society together are willing to give up to get one more
unit of the public good, which will be consumed jointly by all

Question 12

Publicly provided private goods

Answer 12

a large marginal cost associated with supplying additional individuals (e.g. education, water, insurance)
If provided freely, there is likely to be overconsumption
Still, if costs of using price system too high it may be more efficient to provide the good publicly and to finance through general taxation, even though that causes a distortion.

Question 13

Given that inefficiencies arising from overconsumption when no fees for such PPPG  governments often try to find way of limiting consumption
What are the 3 ways governments do this?

Answer 13

3 ways:
user fees
Uniform provision
Queuing
1. User fees
Advantage: Those who benefit bear the costs.
Disadvantages: Results in underconsumption.
Administering pricing system adds TrC.
2. Uniform provision (e.g. uniform level of free education, social security for retired)
Advantage: Saves on transactions costs.
Disadvantages: Leads some to underconsume, others to overconsume – no adjustment to private needs and tastes. High demanders may supplement public consumption, increasing total TrC.
3. Queuing
Advantage: Goods (like health care) allocated not necessarily on basis of who is wealthiest.
Disadvantages: Alternative basis of allocation(who has time to spare) may be undesirable. Time is wasted.