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Part

III

Imperfectly Compe00ve Markets

Playconomics, LHS

Imperfect vs. Perfect


Im-perfect = Perfect except that one or more of
the following assump?ons apply:
Consumers/suppliers are
price-takers, or
Goods are
homogeneous, or
There
externali?es, or
Goods are
excludable and rival, or
(not full) informa?on, or
free entry and exit.
Playconomics, LHS

Imperfect vs. Perfect


Im-perfect = Perfect except that one or more of
the following assump?ons apply:
Consumers/Suppliers are NOT price-takers,
Goods are NOT homogeneous, or
There ARE externali?es, or
Goods are NOT excludable and rival, or
Imperfect (not full) informa?on, or
So what happens?
NO free entry and exit.
Playconomics, LHS

Chapter 10: Public Goods

Playconomics, LHS

Public Goods
Some

Educa&on
Health system
Na&onal defense
Judiciary system
Non-rivalry &
Non-excludability

Playconomics, LHS

Non-rivalry & Non-excludability


Deni0on:
Non-Rivalry: One individuals consump?on of the
good does not impede another individual from
consuming it as well: the MC of providing the
public good to an addi?onal individual is zero.

Playconomics, LHS

Non-rivalry & Non-excludability


Deni0on:
Non-Excludability: No one can be excluded from
consuming the good.

Playconomics, LHS

Non-rivalry & Non-excludability


Deni0ons:
Pure Public Goods represent goods that are
perfectly non-rivalrous & non-excludable.
Impure Public Goods represent goods that are
non-rivalrous & non-excludable only up to a point.

Playconomics, LHS

Pure vs. Impure Public Goods


Excludable, but non-rivalrous
Pay TV (needs subscrip?on, but your enjoyment is not
aected by someone else watching TV)
Busses, airplanes, etc

Non-excludable, but rivalrous


Congested motorway (no toll, but takes longer ?me)
Hospitals, schools, public transport, this Micro 1 course
PURE
IMPURE
Playconomics, LHS

Aggregate Demand:
Marginal Social Benet (MSB) & Eciency


Want to hire a cleaner
How many hours of cleaning per week should they
contract for?

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Aggregate Demand: MSB & Eciency

Playconomics, LHS

11

Marginal Social Benet (MSB)


Deni0on:
The Marginal Social Benet is the ver?cal sum of
the individual marginal benets.

Playconomics, LHS

12

Aggregate Demand: MSB & Eciency

Playconomics, LHS

13

Eciency
Say
What is the ecient number of hours Anna
& Zoe should hire the cleaner for?

Marginal Ind. Benets = Marginal Social Benet =



Samuelson Condi0on

6 hours

Playconomics, LHS

14

Eciency
Deni0on:
The Samuelson Condi0on states that the ecient
quan?ty of a public good is found by seing the
sum of the individual marginal benets equal to
the marginal cost.

Playconomics, LHS

15

Market Provision and Free-Riding


Do markets provide goods eciently?
for
goods
for
goods WHY?


Lek to their own devices, will Anna and
Zoe hire the cleaner for the ecient
number of hours?
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Market Provision and Free-Riding


Say

4 hours

0 hours
Just Free-Ride on Anna
Under-Provision!!!

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Market Provision and Free-Riding


Deni0on:
Free-Riding denotes the ac?on of enjoying a good
without paying for it is caused by the non-
excludable nature of public goods and it results in
their under-provision.

Playconomics, LHS

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Market Provision and Free-Riding

Why shouldnt Anna and Zoe AGREE on 6 hours per


week at $30 per hour (the ecient # of hours)?

Anna and Zoe could SHARE the MC:

Anna could pay her marginal benet $20 per hour


Zoe could pay her marginal benet $10 per hour

$30 per hour

Wont Work! L
Playconomics, LHS

Lindahl prices
19

Market Provision and Free-Riding


Deni0on:
Lindahl Prices imply that each individual pays for
the provision of a public good according to their
marginal benet.

Playconomics, LHS

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Market Provision and Free-Riding

Does Zoe prefer to pay the Lindahl Price (6 hours) or to free-ride (4 hours)?

Say

Playconomics, LHS

21

Public Goods and Externali?es


A public good is an extreme case of posi0ve externality!

Like posi?ve externali?es (remember perfume!)
(everyone can enjoy Maias perfume) AND
by the market
Extreme case because unlike standard externali?es the
benet accrued to those who enjoy the public good does not
depend on who is providing it (could be either Zoe or Anna)
another way of dening
Playconomics, LHS

22

Market, Government & Taxa?on


each individual can benet from
someone elses public good provision
an individual cannot be stopped
from enjoying it.

GOVERNMENT INTERVENTION

Solu0on:
Playconomics, LHS

23

Market, Government & Taxa?on


GOVERNMENT INTERVENTION
Solu0on:

Government hires the cleaner for 6 hours and tax


Anna & Zoe $20 and $10 per hour (their Lindahl prices).

BUT NOT PERFECT!


MBAnna & MBZoe are NOT common knowledge! THEY
have an incen?ve to understate their true valua?ons,
hoping to free-ride on the others provision.
Playconomics, LHS

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Market, Government & Taxa?on


GOVERNMENT INTERVENTION
Solu0on:

As individual demands are private info, the


Government must follow
:
tax according to ability to pay
tax according to pay-as-you-go principle

Playconomics, LHS

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