Chapter 16 Government and Market Failure. Private goods are rivalous and excludable Both features must be present Rivalry means when someone buys.

Chapter 16Government and Market Failure

Private goods are rivalous and excludable Both features must be present Rivalry means when someone buys and

consumes a good, they prevent anyone else from buying and consuming that good

Excludability means the seller can exclude non-payers from enjoying the product

These characteristics are not found for public goods—their absence makes it impossible for private providers to profit from offering these products

Public goods are nonrivalous and nonexcludable

Nonrivalry means that more than one person can consume the same good at the same time

Watching a ballgame is a nonrivalrous good, though particular seats in a ballbark are rivalous. Ballgames are provided privately because they are excludable.

Nonexcludability means that the good’s benefits cannot be limited to those who pay for it

If consumers can enjoy satisfaction from a nonrivalous good, and cannot be excluded from using it even when they don’t pay….

There’s no incentive to pay for the good if it is offered on the market,

And there’s no incentive for private agents to offer it for sale….

So it must be provided by the government or not at all.

The optimal amount is determined by the collective willingness to pay, the vertical sum of the prices for a given quantity (marginal social benefit)

And the intersection with the marginal cost

Net benefit = marginal benefit – marginal cost

NB = MB – MC Determines the socially optimal quantity

aka “spillover” costs and benefits Negative externalities (external costs) result in

a lower production cost being borne by the producer and being passed onto consumers

Creates an overallocation of resources—producers produce too much

Positive externalities (external benefits) result in more satisfaction being received by consumers than producers can charge for

Results in underallocation of resources—producers produce too little

Market processes can internalize all costs and benefits, provided◦ A. Property rights are well understood, enforced,

and mutually agreed on,◦ B. The number of independent negotiating

agents is small, and◦ C. Transaction costs, including costs of

bargaining, are small enough to be negligible. Too many participants or too high

transaction costs make a private solution unworkable.

Only producers know their marginal costs, and only consumers know their own marginal benefits

Used car dealers know whether the car is a lemon

Buyers find out later Results in a market solution that all used

cars are worth significantly less than new cars

Lojack and other car antitheft devices lower car theft, even of cars without them

Local crackdowns on chopshops reduce theft

Crackdowns on traffickers in stolen car audio equipment yield even better benefits