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Terms in this set (29)
Market demand for a public good
When a fully functioning market cannot operate well, we have a market failure:
the result of an inefficient market allocation
Environmental problems can be modeled as market failures by using either
the Theory of Public goods or the Theory of Externalities
If the market is defined as a market for "environmental quality," then the source of the market failure is that such environmental quality is
a public good
If the market is defined as market of a good whose production or consumption generates environmental damages (the by-product), then the market failure is due to the
Theory of Public Good
A public good is a good or service that is nonrival in consumption and yields nonexcludable benefits.
How to find demand of public good?
The market demand for public good is derived by Vertical summing.
Economic incentives "Wolves"
Defenders of Wildlife created a Wolf Compensation Trust.
The Trust Fund pays ranchers for any livestock killed by a wolf.
Vertical summing is based on
individual Marginal Benefits, i.e., willingness to pay
Sometimes consumers don't want to disclose their true MB, or simply refuse to pay because they can benefit from the same public good when it is purchased by someone else
A common solution to free-ridership is
Direct provision of public goods by Government
is a spillover effect associated with production that extends to a third party outside the market transaction
an external effect that generates benefits to a third party
Education, Flu shot, Your neighbor's beautiful garden
an external effect that generates costs to a third party
Pollution, Construction noise
The Competitive equilibrium is NOT allocative efficient for the whole society when
the third party is included
When the local residents are included, Competitive equilibrium
When the local residents are included, Competitive equilibrium is no longer efficient.
for the society requires that all costs, including pollution cost on third party, are considered
Social Allocative Efficient Equilibrium
includes third party
without third party
Marginal Social Benefit (MSB)
Marginal private benefit plus Marginal external benefit
MSB = MPB+MEB
Marginal Social Cost (MSC)
Marginal private cost plus Marginal external cost
MSC = MPC+MEC
For the Social allocative efficient equilibrium, we need to set
MSB = MSC
MPB - MPC
MSC - MPC
The key reason of such market failure is the absence
absence of well defined property right
The set of valid claims to a good or resource that permits its use and the transfer of its ownership through sale
are the entitlements that define the ownership, the owner's rights and restrictions of using the goods or resources
A well defined property right must have three features:
3. Enforceability (to secure the property rights)
Proper assignment of property rights, even if externalities are present, will allow bargaining between parties such that (social) efficient equilibrium can be obtained, regardless of who holds rights
-Assume costless transactions
-Assume perfect information (property rights can be clearly defined)
-Assume damages are accessible and measurable
Limitations of Coase Theorem
•Bargaining is not cost free. If too high, transaction won't take place.
Hard to define and divide property rights
•Nonexcludability, free ridership, etc.
•Fewer number of parties may reduce transaction cost but also can manipulate the market.
•Imperfect information and high monitoring cost.
Common Property Resources
Common Property Resources are those for which property rights are shared
-Rival and non excludable
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