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University of Hawai‘i at Mānoa Department of Economics

Explore the economic role of the public sector, market failures, public goods, externalities, and taxation in ECON 130 lectures. Understand optimal public good provision, user fees, taxes, and remedies for externalities.

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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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