AP Econ Week#22
Winter 2014
Ch#5
Economics 2/9/15
http://mrmilewski.com
• OBJECTIVE: Continue examination of market
failures. APMicro-I.B
• Language objective: Write about dead weight loss.
• I. Journal#53 pt.A
-ACDC Econ Anchorman
-ACDC Micro 4.13 Dead Weight Loss
• II. Journal#53 pt.B
-notes on dead weight loss
(Chapter#5)
• Homework: On learnsmart & Finish reading Ch#5
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Efficiency Revisited
Price (per bag)
Consumer
surplus
S
P1
Producer
surplus
D
Q1
Quantity (bags)
LO2
5-4
Efficiency Losses
Price (per bag)
a
Efficiency loss
from underproduction
S
d
b
e
D
c
Q2 Q1
Quantity (bags)
LO2
5-5
Efficiency Losses
Price (per bag)
a
Efficiency loss
from overproduction
S
f
b
g
D
c
Q1 Q3
Quantity (bags)
LO2
5-6
Private Goods
• Produced in the market by firms
• Offered for sale
• Characteristics
• Rivalry
• Excludability
LO3
5-7
Public Goods
• Provided by government
• Offered for free
• Characteristics
• Nonrivalry
• Nonexcludability
• Free-rider problem
LO3
5-8
Demand for Public Goods
Demand for a Public Good, Two Individuals
(1)
Quantity
of Public
Good
(2)
Adams’ Willingness
to Pay (Price)
1
$4
+
$5
=
$9
2
3
+
4
=
7
3
2
+
3
=
5
4
1
+
2
=
3
5
0
+
1
=
1
LO3
(3)
Benson’s
Willingness to
Pay (Price)
(4)
Collective
Willingness
to Pay (Price)
5-9
Demand for Public Goods
Benson’s Demand
$4 for 2 Items
$2 for 4 Items
P
$6
5
4
3
2
1
0
D2
1
2
3
4
Q
5
Benson
Adams’ Demand
$3 for 2 Items
$1 for 4 Items
P
$6
5
4
3
2
1
0
D1
1
2
3
4
Q
5
Adams
Collective Demand
$7 for 2 Items
$3 for 4 Items
Connect the Dots
P
S
$9
7
5
Collective
Willingness
To Pay
3
DC
1
0
1
2
3
4
5
Collective Demand and Supply
LO3
Optimal
Quantity
Q
5-10
Cost-Benefit Analysis
• Cost
• Resources diverted from private good
•
LO3
production
• Private goods that will not be produced
Benefit
• The extra satisfaction from the output
of more public goods
5-11
Cost-Benefit Analysis
Cost-Benefit Analysis for a National Highway Construction Project
(in Billions)
(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
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
LO3
$0
$0
5-12
Quasi-Public Goods
• Could be provided through the market
•
•
LO3
system
Because of positive externalities the
government provides them
Examples: education, streets, libraries
5-13
The Reallocation Process
• Government
• Taxes individuals and businesses
• Takes the money and spends on
production of public goods
LO3
5-14
Externalities
• A cost or benefit accruing to a third party
•
•
LO4
external to the transaction
Positive externalities
• Too little is produced
• Demand-side market failures
Negative externalities
• Too much is produced
• Supply side market failures
5-15
Externalities
P
Negative
Externalities
a
P
St
b
St
y
z
S
Positive
Externalities
Dt
x
c
D
D
Overallocation
0
Qo
Qe
(a)
Negative externalities
LO4
Underallocation
0
Q
Qe
Qo
Q
(b)
Positive externalities
5-16
Economics 2/10/15
http://mrmilewski.com
• OBJECTIVE: Continue examination of market
failures. APMicro-I.B
• Language objective: Write about market failures.
• I. Journal#54 pt.A
-ACDC Micro Market Failures
• II. Journal#54 pt.B
-notes on market failures
(Chapter#5)
• Notice: Chapter#4&5 Test is on Friday Feb 13th
Government Intervention
• Correct negative externalities
• Direct controls
• Specific taxes
• Correct positive externalities
• Subsidies and government provision
LO4
5-18
Government Intervention
P
Negative
Externalities
a
b
P
St
St
a
S
T
c
0
LO4
S
D
Overallocation
Qo Qe
Q
D
0
Qo Qe
Q
(a)
(b)
Negative Externalities
Correct externality with
tax
5-19
Government Intervention
y
St
z
St
St
Subsidy
S't
Positive
Externalities
x
Dt
Subsidy Dt
D
D
U
D
Underallocation
0
Qe
Qo
(a)
Positive Externalities
LO4
0
Qe
Qo
(b)
Correcting via a subsidy
to consumers
0
Qe
Qo
(c)
Correcting via a subsidy
to producers
5-20
Government Intervention
Methods for Dealing with Externalities
Problem
Resource Allocation
Outcome
Ways to Correct
Negative externalities
(spillover costs)
Overproduction of output
and therefore
overallocation of
resources
1.
2.
3.
4.
5.
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
1.
2.
3.
4.
Private bargaining
Subsidy to consumers
Subsidy to producers
Government provision
LO4
5-21
Society’s Marginal Benefit and Marginal
Cost of Pollution Abatement (Dollars)
Society’s Optimal Amounts
MC
Socially
Optimal Amount
Of Pollution
Abatement
MB
0
LO5
Q1
5-22
Government’s Role in the Economy
• Government can have a role in correcting
•
•
LO5
externalities
Officials must correctly identify the
existence and cause
Has to be done in the context of politics
5-23
Controlling Carbon Dioxide Emissions
• 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
5-24
Economics 2/11/15
http://mrmilewski.com
• OBJECTIVE: Complete examination of market
failures. APMicro-I.B
• Language objective: Write about market failures.
• I. Administrative Stuff
-Micro 6.2 Pollution, the Gov’t, and MSB=MSC
• II. Review for Chapter#4&5 Test
• Notice: Chapter#4&5 Test is on Friday!
Economics 2/12/15
http://mrmilewski.com
• OBJECTIVE: Complete examination of market
failures. APMicro-I.B
• Language objective: Write about market failures.
• I. Administrative Stuff
-Micro 6.3 Negative Externalities-ACDC Econ
-Micro 6.4 Positive Externalities- ACDC Econ
• II. Review for Chapter#4&5 Test
• Notice: Chapter#4&5 Test is TOMORROW!
New Access Code
• W433-DX47-G6NJ-87EA-RH66