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Part III Imperfectly Compe00ve Markets
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Imperfect vs. Perfect
Im-‐perfect = Perfect except that one or more of the following assump?ons apply: • Consumers/suppliers are price-‐takers, or • Goods are homogeneous, or • There externali?es, or • Goods are excludable and rival, or
(not full) informa?on, or free entry and exit.
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Imperfect vs. Perfect
Im-‐perfect = Perfect except that one or more of the following assump?ons apply: • Consumers/Suppliers are NOT price-‐takers, • Goods are NOT homogeneous, or • There ARE externali?es, or • Goods are NOT excludable and rival, or • Imperfect (not full) informa?on, or • NO free entry and exit. So what happens?
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Chapter 10: Public Goods
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Public Goods
Some : • Educa&on • Health system • Na&onal defense • Judiciary system
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Non-‐rivalry & Non-‐excludability
Non-‐rivalry & Non-‐excludability
Defini0on: Non-‐Rivalry: One individual’s consump?on of the good does not impede another individual from consuming it as well: the MC of providing the public good to an addi?onal individual is zero.
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Non-‐rivalry & Non-‐excludability
Defini0on: Non-‐Excludability: No one can be excluded from consuming the good.
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Non-‐rivalry & Non-‐excludability
Defini0ons: Pure Public Goods represent goods that are perfectly non-‐rivalrous & non-‐excludable. Impure Public Goods represent goods that are non-‐rivalrous & non-‐excludable only up to a point.
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Pure vs. Impure Public Goods
• Excludable, but non-‐rivalrous – Pay TV (needs subscrip?on, but your enjoyment is not affected by someone else watching TV)
– Busses, airplanes, etc
• Non-‐excludable, but rivalrous – Congested motorway (no toll, but takes longer ?me) – Hospitals, schools, public transport, this Micro 1 course
PURE IMPURE
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Aggregate Demand: Marginal Social Benefit (MSB) & Efficiency
• Want to hire a cleaner
• How many hours of cleaning per week should they contract for?
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Aggregate Demand: MSB & Efficiency
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Marginal Social Benefit (MSB)
Defini0on: The Marginal Social Benefit is the ver?cal sum of the individual marginal benefits.
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Aggregate Demand: MSB & Efficiency
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Efficiency Say What is the efficient number of hours Anna & Zoe should hire the cleaner for?
Σ Marginal Ind. Benefits = Marginal Social Benefit = Samuelson Condi0on
6 hours
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Efficiency
Defini0on: The Samuelson Condi0on states that the efficient quan?ty of a public good is found by seing the sum of the individual marginal benefits equal to the marginal cost.
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Market Provision and Free-‐Riding
Do markets provide goods efficiently? à for goods à for goods à WHY?
Lek to their own devices, will Anna and Zoe hire the cleaner for the efficient
number of hours?
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Market Provision and Free-‐Riding Say
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4 hours
Under-‐Provision!!!
0 hours Just Free-‐Ride on Anna
Market Provision and Free-‐Riding
Defini0on: Free-‐Riding denotes the ac?on of enjoying a good without paying for it à is caused by the non-‐excludable nature of public goods and it results in their under-‐provision.
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Market Provision and Free-‐Riding
Why shouldn’t Anna and Zoe AGREE on 6 hours per week at $30 per hour (the efficient # of hours)?
Anna and Zoe could SHARE the MC: • Anna could pay her marginal benefit à $20 per hour • Zoe could pay her marginal benefit à $10 per hour
$30 per hour
Lindahl prices
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Won’t Work! L
Market Provision and Free-‐Riding
Defini0on: Lindahl Prices imply that each individual pays for the provision of a public good according to their marginal benefit.
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Market Provision and Free-‐Riding Does Zoe prefer to pay the Lindahl Price (6 hours) or to free-‐ride (4 hours)?
Say
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Public Goods and Externali?es
A public good is an extreme case of posi0ve externality!
• Like posi?ve externali?es (remember perfume!) à (everyone can enjoy Maia’s perfume) AND
by the market
• Extreme case because unlike standard externali?es à the benefit accrued to those who enjoy the public good does not depend on who is providing it (could be either Zoe or Anna) à another way of defining
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Market, Government & Taxa?on
à each individual can benefit from someone else’s public good provision
à an individual cannot be stopped from enjoying it.
GOVERNMENT INTERVENTION
Solu0on:
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Market, Government & Taxa?on
Government hires the cleaner for 6 hours and tax Anna & Zoe $20 and $10 per hour (their Lindahl prices).
BUT NOT PERFECT! MBAnna & MBZoe are NOT common knowledge! à THEY have an incen?ve to understate their true valua?ons, hoping to free-‐ride on the other’s provision.
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Solu0on:
GOVERNMENT INTERVENTION
Market, Government & Taxa?on
As individual demands are private info, the Government must follow : à tax according to ability to pay à tax according to pay-‐as-‐you-‐go principle
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Solu0on:
GOVERNMENT INTERVENTION