1. Review Activity 2-7: Ceilings and Floors
2. Lesson 2-8 (part 1): Property Rights, Market Failure, and
3. HW: Activity 2-8
• Property Rights : Ownership (maintenance & rights to proceeds) and control over a resource or a commodity.
• Cornerstone of an effective market economy.
• When individuals own resources, they have incentives to allocate those resources to their most highly valued uses.
• Q: Homeowner vs. Renter
• If property rights to resources are not clear, the market can produce a quantity that is different from the
Socially Optimal Quantity.
• Remember, Equilibrium quantity in a competitive market is determined by the intersection of S and D curves.
• Marginal Private Benefit (MPB): Marginal benefit enjoyed by an individual in actually consuming a good.
• MPB = Demand Curve
• Marginal Social Benefit (MPB): Additional benefit of an activity as viewed by society
• Expressed as the sum of marginal external benefit
( MEB- positive byproducts ) and marginal private benefit .
• Creates a positive Externality : A consequence of an economic activity that is experienced by unrelated third parties.
• Marginal Private Costs (MPC): Marginal cost incurred by a business in actually producing a good.
• MPC = Supply Curve
• Marginal Social Costs (MSC): Extra cost of an activity as viewed by the society
• Expressed as the sum of marginal external cost ( MEC- Negative byproducts ) and marginal private cost.
• Creates negative externality.
Lesson 2-8 Continued
Market Failure: Externalities
• Deadweight Loss: The costs to society created by market inefficiency (When MSC DOES NOT Equal MSB)
• The Value of things that should have been done…
• Lets Draw…
- Externality on Production
1. You play loud music at night
2. You drive to work causing extra traffic and pollution
+ Externality on Consumption
Your teacher’s education
2. You walk to work limiting pollution
+ Externality on Production
1. You bake cookies
2. A new airport is build near your home
- Externality on consumption
1. You smoke cigarettes