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University of Hawai‘i at Mānoa Department of Economics

University of Hawai‘i at Mānoa Department of Economics. ECON 130 (003): Principles of Economics (Micro) http://www2.hawaii.edu/~lindoj Gerard Russo Lectures #29 & #30 Tuesday, April 27, 2004 and Thursday, April 29, 2004. ANNOUNCEMENTS. LAST LECTURE

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University of Hawai‘i at Mānoa Department of Economics

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  1. University of Hawai‘i at MānoaDepartment of Economics ECON 130 (003): Principles of Economics (Micro) http://www2.hawaii.edu/~lindoj Gerard Russo Lectures #29 & #30 Tuesday, April 27, 2004 and Thursday, April 29, 2004

  2. ANNOUNCEMENTS • LAST LECTURE • Tuesday, May 4, 2004, 12:00-1:15 PM, BIL 152 • Review Session • Thursday, May 6, 4:30-5:30 PM, BIL 152 • FINAL EXAMINATION • Thursday, May 13, 2004, 12:00-2:00 PM, BIL 152

  3. Lectures 29 & 30 • Economic Role of the Public Sector • Public Goods • Externalities

  4. Economic Role of the Public Sector • Market Failure • Equity

  5. Market Failure • Public Goods • Free Rider Problem • Externalities • Imperfect Information • Non-Competitive Outcomes • Natural Monopoly

  6. PUBLIC GOOD PROPERTIES

  7. PUBLIC versus PRIVATE • PURE PUBLIC GOODS • National Defense • PURE PRIVATE GOODS • Food • Cancer Treatment • PUBLICLY PROVIDED GOODS • Education • Health Services

  8. $/Q Aggregate Public Good Demand is the Vertical Summation of Private Demands. Total Public Good Demand= D1+D2 D2: MB2 D1: MB1 0 Q

  9. $/Q OPTIMAL PUBLIC GOOD PROVISION MC MC= ∑MB=MB1+MB2 D2: MB2 D1: MB1 0 Q*: Optimal Public Good Provision Q

  10. OPTIMAL PUBLIC GOOD PROVISION: LINDAHL EQUILIBRIUM $/Q MC MC= ∑MB=MB1+MB2 P2 P1 D2: MB2 D1: MB1 0 Q*: Optimal Public Good Provision Q

  11. Rationing Publicly Provided Goods • User Charges • Uniform Provision • Queuing

  12. USER FEES • Purpose of User Fees • Price Discrimination

  13. PURPOSE OF USER FEES • Allocative Efficiency • Self-Financing Mechanism • Cross-Subsidization • Stimulate the Private Sector • Consciousness of Beneficiaries • sense of value • price as a measure of quality

  14. TAXES • Commodity Tax • Ad Valorem Tax • Specific Tax • Value-Added Tax (VAT) • Consumption Tax • Wage Tax • Income Tax

  15. TAXATION • 30-50% Excess Burden • Cigarette Taxation • Alcohol Taxation • Drug Taxation • Gasoline/Fuel Taxation

  16. Externalities • Negative Externalities • Pollution • Drunk Driving • Barking Pet Dogs • Positive Externalities • Bee Keeping • Well-Kept Neighbor’s Lawn & Garden • Research & Development with Positive Spillovers

  17. $/KWH NEGATIVE EXTERNALITY EXAMPLE: Market for Electrical Power SMC S: PMC PE D: SMB 0 QE KWH

  18. $/KWH NEGATIVE EXTERNALITY EXAMPLE: Market for Electrical Power SMC Welfare Loss Due to Pollution S: PMC E F Pe G D: SMB H 0 Q* SociallyOptimal Qe KWH

  19. Possible Remedies • Coasean Solution • Coase Theorem • Transaction Costs/Contracting Costs • Pigouvian Taxation/Corrective Taxation • Pigouvain Subsidization for Positive Exeternalities/Corrective Subsidies

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