chapter 18 FINAL Flashcards
(26 cards)
equilibrium in a free market yields a number of important results..
- goods must be produced at the lowest possible cost
- goods must satisfy the highest valued demands
- total surplus (consumer plus producer surplus) is maximized
* some types of goods will not yield those results
excludability
a person can be prevented from using a good
rivalry
one person’s use of a good diminishes other peoples use
private goods
excludable & rival
public goods
neither excludable nor rival
common resources
rival but not excludable
natural monopolies
excludable but not rival
ice cream cones, clothing, and congested toll rolls
private goods
fish in the ocean, the environment, congested non toll rodes
common resources
fire protection, cable TV, uncongested toll roads
natural monopolies
tornado siren, national defense, uncongested non toll rolls
public goods
free rider
a person who receives the benefit of a good but avoids paying for it
free rider problem
what does it prevent
people cannot be excluded from the benefits of a public good, so people may withhold from paying for it in hopes that someone else will
it prevents private markets from supplying public goods
two ways to solve the free-rider problem
- the government can decide to provide the public good if the benefits exceed the cost
- the government can make everyone better off by providing the public good and paying for it with tax revenue
important public goods
national defense
basic research-patents cover specific knowledge not general knowledge
fighting poverty- everyone would prefer to live in a society without poverty
cost benefit analysis
study that compares the costs and benefits to society of providing a public good
to decide to provide a public good or not the total benefits must be compared to the costs of providing and maintaining that good
cost-benefit analysis would be used to estimate
why is it hard?
the total costs and benefits of the project to society as a whole
its hard because the absence of price to estimate social benefits (value of life, time, etc.)
ideally, how much public goods should the government produce
the amount that maximizes total surplus
why is it hard for the goverement to determine how much to supply
its not known to the government how much each person values the good
what ways can help the government produce optimal amounts of public goods
voting and other democratic processes
common resources are
not excludable. they are free of charge to anyone who would like to use them
rival: one person’s use of the common resource reduced other people’s use
tragedy of the commons
parable that illustrates why common resources get used more than is desirable from the standpoint of society as a whole
used excessively bc people are not charged for using them (similiar to a negative externality)
important common resources
clean air & water, congested roads, fish whales, & other wild life
solutions to the tragedy of the commons
social customs, government regulations, tradeable allowances
