Presentation 1
Fracking Video
 http://www.youtube.com/watch?v=Xg4VNGFP6qE
Economic Rent
 The price paid for the use of land and other natural
resources that are completely fixed in total supply
 http://www.youtube.com/watch?v=k_fMDcBr9w8
Different Interest Rates
 Discount Rate- the interest rate the Fed charges on
loans made to banks (0.75%)
 Federal Funds Rate- interest rate that banks charge
one another for overnight loans (.25%)
 Prime Interest Rate- the benchmark interest rate that
banks use as a reference point for loans to individuals
and firms (3% higher than the Fed Funds)
Private Goods
 A good or service that is individually consumed and
that can be profitably provided by privately owned
firms because they can exclude non-payers from
receiving the benefits
 Ex- goods sold at stores or on the internet
Private Goods Cont’d
 Two characteristics:
 1. Rivalry- when one person buys and consumes a
product, it is not available for another person
 2. Excludability- sellers can keep people who do not
pay for a product from obtaining its benefits
Public Good
 A good or service provided by the government with 2
characteristics:
 1. Non-rivalry- one person’s consumption of a good
does not preclude consumption of the good by others
 2. Non-excludability- there is no effective way of
excluding individuals from the benefit of the good
once it comes into existence
Free-Rider Problem
 Once a producer has provided a public good, everyone
including non-payers can benefit
 Why pay when it’s for free?
Optimal Quantity of a Public Good
 The government uses surveys and public votes to
estimate the demand for a public good
 They then compare the MB of an added unit of the
good against the MC of providing it
 MB = MC Rule
Cost-Benefit Analysis
 A comparison of the marginal cost of a government
project or program with the marginal benefits to
decide whether or not to employ resources in that
project/program and to what extent
Externalities
 A cost or benefit from production or consumption,
without compensation to someone other than the
buyers and sellers of the product
 “Spillover”
Positive Externality
 A benefit obtained without compensation by third
parties for the production or consumption of buyers
and sellers
 Spillover benefit
 Ex- a beekeeper benefits when a neighboring farmers
plants clover
 Ex- Having people inoculated from disease
Positive Externality Cont’d
 When positive externalities occur the market demand
curve lies to the left of the full-benefits demand curve
(under-allocation)
 EX- people who don’t get sick due to others being
inoculated
Negative Externalities
 A cost imposed without compensation on third parties
by the production or consumption of sellers or buyers
 EX- manufacturer dumps toxic wastes into the river
killing the fish population sought by fisherman
Negative Externalities Cont’d
 Supply is too high and the government may need to
intervene
 Over-allocation of this commodity
G 28.1
Negative Externalities
Positive Externalities
P
P
Negative
Externalities
St
S social
Positive
Externalities
S private
Dt
D
D
Overallocation
0
Qo
Qe
Underallocation
Q
0
Qe
Qo
Q
Subsidy to the Buyer for a
Positive Externality
Subsidy to the Producer for a
Positive Externality
Reducing a Negative Externality
through Taxation
Coase Theorem
 U of Chicago Economist Ronald Coase
 Believed that the government isn’t needed to regulate
external costs/benefits where:
 A. property ownership is clearly defined
 B. # of people involved is small
 C. bargaining costs are minimal
 **bargaining will allow acceptable solutions to the
externality problems