Public goods and externalities: examples and exercises Lecture 12 – academic year 2014/15 Introduction to Economics Fabio Landini Example of the bridge: two-ways table Many Ye s Tax No Excludable Not Excludable Rival (PRIVATE GOOD) Rival (COLLECTIVE GOOD) Excludable Not Excludable Not Rival (NATURAL MONOPOLY) Not Rival (PUBLIC GOOD) N. persons Few INTRO The book says that both public good entail externalities. A) Are the externalities associated with public goods positive or negative? Give an example. B) Would the quantity of public good produced thorough free market be higher or lower than the efficient one? 3 Index of examples/exercises • INTRO • Ex. 12.1 (externalities and alcohol consumption) • Ex. 12.2 (permit I) • Ex. 12.3 (firms and R&D) • Exercise on public good • Ex. 12.4 (the Economist) • Ex. 12.5 (permit II) Ex.12.1 The higher alcohol consumption, the higher the number of car accidents, and thus the higher the risk of driving. (a) Are there externalities in the market for alcoholic beverages? (b) Is there a net loss with respect to the market equilibrium? Ex.12.2 Firm A B Level of pollution (units) Cost to reduce pollution (units) 110 30 50 10 In order to bring the level of global pollution to 80 units, the Government assigns to each firm 40 tradable permits to pollute one unit. Ex.12.2 a) Who offer the permits in the market? How many? Who purchases them? How many? Explain the motivations behind buyer’s and seller’s decision. b) How much would the cost to reduce pollution be if permits were not tradable? Ex.12.3 People tend to argue that firms tend not not carry out basic research (BR) at an efficient level. Why is this so? a) Which type of good is BR? b) Which type of policy has been adopted by US? c) It is generally believed the the adopted policy increases the technological capabilities of firms with respect to competitors. Is this argument coherent with the adopted classification? Exercise on public goods 100 inhabitants of a urban district are worried about their SECURITY. N. Guards 24h Tot. Cost (Euro) Individual benefit for each inhabitant (Euro) 0 0 0 1 150 10 2 300 16 Exercise on public goods Questions: a)Is the surveillance service a public good for inhabitants? Why? b)If one inhabitant decided to the pay the surveillance service by her own, how many guards would she hire? c)If 50 inhabitants made an agreement in which all pay one share of the cost of surveillance, how many guards would they hire? Ex.12.5 The Economist , 19/03/1994: “in the last decade, world’s fishing areas have been exploited near to their depletion”. Then, analysis of the problem and possible solutions, both private and public: a) “Fishers cannot be blamed for over-exploitation, somehow, they behave rationally ad they have always done”. In which sense is over-exploitation rational from the fishers’ point of view? Ex.12.5 b) “A community, tighten by common obligations and interests, is able to self-manage a common resource”. Explain. Ex.12.5 c) “Until 1976 most part of the world’s fishing areas were open to everybody, making it impossible to apply any policy for preservation. Since then, international law has extended the national jurisdiction from 12 to 200 miles form the coast”. Explain how this agreement can contribute to (partially) solve the problem. Ex.12.5 d) Several governments encourage fishing by giving aids to fishers. Explain in which way these incentives favoured over-exploitation. e) “Only if fishers will be granted an exclusive right on a specific fishing area management as efficient as the one of a farmer on her own land will obtain”. Find argument in support of this statement. f) Are there other policy interventions that could be implemented in order to reduce over-exploitation of world’s fishing areas?