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McConnellMicro13_Ch05.ppt

Uploaded: 4 years ago
Contributor: Gorn
Category: Economics
Type: Other
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Filename:   McConnellMicro13_Ch05.ppt (3.54 MB)
Page Count: 31
Credit Cost: 5
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PART 2 PRICE, QUANTITY, AND EFFICIENCY Prepared by Dr. Amy Peng Ryerson University © 2013 McGraw-Hill Ryerson Ltd. Differentiate between demand side market failures and supply-side market failures. Explain the origin of both consumer surplus and producer surplus, and explain how properly functioning markets maximize their sum, economic surplus, while optimally allocating resources. Describe free riding and public goods, and illustrate why private firms cannot normally produce public goods. Explain how positive and negative externalities cause underallocations and overallocations of resources. © 2013 McGraw-Hill Ryerson Ltd. Chapter 5 * A demand-side market failure Demand curves do not reflect consumers’ full willingness to pay for a good or service. A supply-side market failure Supply curves do not reflect the full cost of producing a good or service. © 2013 McGraw-Hill Ryerson Ltd. Chapter 5, LO1 * Demand curve must reflect the consumers full willingness to pay Supply curve must reflect all the costs of production © 2013 McGraw-Hill Ryerson Ltd. Chapter 5, LO2 * Difference between what a consumer is willing to pay for a good and what the consumer actually pays Extra benefit from paying less than the maximum price © 2013 McGraw-Hill Ryerson Ltd. Chapter 5, LO2 * (1) Person (2) Maximum Price Willing to Pay (3) Actual Price (Equilibrium Price) (4) Consumer Surplus Bob $13 $8 $5 (=$13-$8) Barb 12 8 4 (=$12-$8) Bill 11 8 3 (=$11-$8) Bart 10 8 2 (=$10-$8) Brent 9 8 1 (= $9-$8) Betty 8 8 0 (= $8-$8) © 2013 McGraw-Hill Ryerson Ltd. Chapter 5, LO2 * D Q1 P1 Consumer Surplus Equilibrium Price © 2013 McGraw-Hill Ryerson Ltd. Chapter 5, LO2 * Difference between the actual price a producer receives and the minimum price they would accept Extra benefit from receiving a higher price © 2013 McGraw-Hill Ryerson Ltd. Chapter 5, LO2 * (1) Person (2) Minimum Acceptable Price (3) Actual Price (Equilibrium Price) (4) Producer Surplus Carlos $3 $8 $5 (=$8-$3) Courtney 4 8 4 (=$8-$4) Chuck 5 8 3 (=$8-$5) Cindy 6 8 2 (=$8-$6) Craig 7 8 1 (=$8-$7) Chad 8 8 0 (=$8-$8) © 2013 McGraw-Hill Ryerson Ltd. Chapter 5, LO2 * S Q1 P1 Equilibrium price Producer surplus © 2013 McGraw-Hill Ryerson Ltd. Chapter 5, LO2 * S Q1 P1 D Consumer surplus Producer surplus © 2013 McGraw-Hill Ryerson Ltd. Chapter 5, LO2 * Quantity (bags) Price (per bag) c S Q1 Q2 D b d a e Efficiency loss from underproduction © 2013 McGraw-Hill Ryerson Ltd. Chapter 5, LO2 * c S Q1 Q3 D b f a g Quantity (bags) Price (per bag) Efficiency loss from overproduction © 2013 McGraw-Hill Ryerson Ltd. Chapter 5, LO2 * Private goods characteristics Produced in the market by firms Offered for sale Rivalry Excludability © 2013 McGraw-Hill Ryerson Ltd. Chapter 5, LO3 * Public goods characteristics Provided by government Offered for free Nonrivalry Nonexcludability Free-rider problem © 2013 McGraw-Hill Ryerson Ltd. Chapter 5, LO3 * (1) Quantity of Public Good (2) Adams’ Willingness to Pay (Price) (3) Benson’s Willingness to Pay (Price) (4) Collective Willingness to Pay (Price) 1 $4 + $5 = $9 2 3 + 4 = 7 3 2 + 3 = 5 4 1 + 2 = 3 5 0 + 1 = 1 © 2013 McGraw-Hill Ryerson Ltd. Chapter 5, LO3 * Adams Benson D1 D2 Adams’ Demand Benson’s Demand $3 for 2 Items $4 for 2 Items $1 for 4 Items $2 for 4 Items Collective Demand and Supply DC S Collective Demand $7 for 2 Items $3 for 4 Items Connect the Dots Optimal Quantity Collective Willingness To Pay © 2013 McGraw-Hill Ryerson Ltd. Chapter 5, LO3 * Cost Resources diverted from private good production Private goods that will not be produced Benefit The extra satisfaction from the output of more public goods © 2013 McGraw-Hill Ryerson Ltd. Chapter 5, LO3 * (1) Plan (2) Total Cost of Project (3) Marginal Cost (4) Total Benefit (5) Marginal Benefit (6) Net Benefit (4) – (2) No new construction $0 $0 $0 A: Widen existing highways 4 $4 5 $5 1 B: New 2-lane highways 10 6 13 8 3 C: New 4-lane highways 18 8 22 10 5 D: New 6-lane highways 28 10 26 3 -2 © 2013 McGraw-Hill Ryerson Ltd. Chapter 5, LO3 * Could be provided through the market system Because of positive externalities the government provides them Examples: education, streets, libraries © 2013 McGraw-Hill Ryerson Ltd. Chapter 5, LO3 * Government Taxes individuals and businesses Takes the money and spends on production of public goods © 2013 McGraw-Hill Ryerson Ltd. Chapter 5, LO3 * A cost or benefit accruing to a third party external to the transaction Positive externalities Too little is produced Demand-side market failures Negative externalities Too much is produced Supply side market failures © 2013 McGraw-Hill Ryerson Ltd. Chapter 5, LO4 * (a) Negative externalities (b) Positive externalities 0 D S St Overallocation Negative Externalities St Underallocation Positive Externalities Qo Qo Qe Qe P P 0 Q Q D Dt a c z x b y © 2013 McGraw-Hill Ryerson Ltd. Chapter 5, LO4 * Correct negative externalities Direct controls Specific taxes Correct positive externalities Subsidies and government provision © 2013 McGraw-Hill Ryerson Ltd. Chapter 5, LO4 * (a) Negative Externalities D S St Overallocation Negative Externalities Qo Qe P 0 Q a c b (b) Correct externality with tax D S St Qo Qe P 0 Q a T © 2013 McGraw-Hill Ryerson Ltd. Chapter 5, LO4 * (a) Positive Externalities 0 St Underallocation Positive Externalities Qo Qe D Dt z x y (b) Correcting via a subsidy to consumers 0 St Qo Qe D Dt (c) Correcting via a subsidy to producers 0 S't Qo Qe D Subsidy St Subsidy U © 2013 McGraw-Hill Ryerson Ltd. Chapter 5, LO4 * 0 Society’s Marginal Benefit and Marginal Cost of Pollution Abatement (Dollars) Q1 MB MC Socially Optimal Amount Of Pollution Abatement © 2013 McGraw-Hill Ryerson Ltd. Chapter 5, LO4 * Government can have a role in correcting externalities Officials must correctly identify the existence and cause Has to be done in the context of politics © 2013 McGraw-Hill Ryerson Ltd. Chapter 5, LO4 * Problem Resource Allocation Outcome Ways to Correct Negative externalities (spillover costs) Overproduction of output and therefore overallocation of resources Private bargaining Liability rules and lawsuits Tax on producers Direct controls Market for externality rights Positive externalities (spillover benefits) Underproduction of output and therefore underallocation of resources Private bargaining Subsidy to consumers Subsidy to producers Government provision © 2013 McGraw-Hill Ryerson Ltd. Chapter 5, LO4 * Cap and trade Sets a cap for the total amount of emissions Assigns property rights to pollute Rights can then be bought and sold Carbon tax Raises cost of polluting Easier to enforce © 2013 McGraw-Hill Ryerson Ltd. Chapter 5 * 5.1 Market Failures in Competitive Markets 5.2 Efficiently Functioning Markets 5.3 Public Goods 5.4 Externalities © 2013 McGraw-Hill Ryerson Ltd. Chapter 5 *

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