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Principles of MicroEconomics: Econ102

Provide the Rules Contract Law Tort Law Corporation Law Private Property Rights

Promote or Maintain Competition Antitrust Laws: Sherman Act, Clayton Act

Provide Information

The Fallacy of Composition

Merit Goods

Redistribution of Income

Provide Public Goods

Correct for Externalities Negative Positive

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Private good: A good that is both rival and excludable.

Public good: A good that is both non-rivalrous, non-excludable and collective.

Free riding: Benefiting from a good without paying for it………….freeloader, freerider

Quasi-public goods: Goods that are excludable but not rival.

Common resource: A good that is rival but not excludable.

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Rivalry:

The situation that occurs when one person’s consuming a unit of a good means no one else can consume it.

Excludability:

The situation in which anyone who does not pay for a good cannot consume it.

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…………because the market itself fails to provide what consumers desire. Only the government has the legal power to force people to pay.

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Externality:

A benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service.

Negative Externality:

A situation where external costs are borne by someone who is not directly involved in the production of a good or service.

Positive Externality:

A situation where external benefits accrue to someone who is not directly involved in the consumption of a good or service.

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Externalities May Result in Market Failure

Market failure:

A situation in which the market fails to produce the efficient level of output.

What Causes Externalities?

Property rights:

The rights individuals or businesses have to the exclusive use of their property, including the right to buy or sell it.

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Private cost: The cost borne by the producer of a good or service.

Social cost: The total cost of producing a good, including both the private cost and any external cost.

Private benefit: The benefit received by the consumer of a good or service.

Social benefit: The total benefit from consuming a good or service, including both the private benefit and any external benefit.

The Effect of Externalities

The Effect of Pollution on Economic Efficiency

When there Is a Negative Externality, there is an overproduction of the

good, and therefore an over-allocation of resources

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When there Is a Negative Externality, the following will correct for the market failure:

Individual Bargaining

Liability Rules & Lawsuits

Tax on ProducersPigovian Tax

Direct Controls

Market-Based ApproachesMarket for externality rights

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The Effect of a Positive Externality on Efficiency

When there Is a Positive Externality, there is an underproduction of the

good, and therefore an under-allocation of resources

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When There Is a Positive Externality, a Subsidy Can Bring about the Efficient Level of Output

When there Is a Positive Externality, the following will correct for the market failure:

Individual Bargaining

Subsidy to Consumers

Subsidy to Producers

Government Provision

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Principles of MicroEconomics: Econ102

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Utility: The enjoyment or satisfaction that people receive from consuming goods and services.

Marginal utility: The additional utility a person receives from consuming one additional unit of a good or service. It is an important concept in understanding why a given product has the market value that it does…….refer to diamond-water paradox.

Law of diminishing marginal utility: Consumers experience diminishing additional satisfaction as they consume more of a good or service during a given period of time.

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For nearly every good or service, the more you consume during a period of time, the less you increase your total satisfaction from each

additional unit you consume.

Total Utility from Eating Pizza and Drinking Coke

NUMBER OFSLICES OF

PIZZA

TOTAL UTILITYFROM EATING

PIZZA

MARGINAL UTILITY

FROM THELAST SLICE

NUMBER OF CUPS OF

COKE

TOTAL UTILITYFROM

DRINKING COKE

MARGINAL UTILITY

FROM THELAST CUP

0 0 0 0

1 20 1 20

2 36 2 35

3 46 3 45

4 52 4 50

5 54 5 53

6 51 6 52

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Total and Marginal Utility from Eating Pizza on Super Bowl

Sunday

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………..if it is true that you buy up to that unit at which the marginal benefit (utility) is equal to the price, and it is true that the marginal benefit (utility) diminishes as more of the product is bought, then the price must fall in order to induce you to buy the next unit…………….wow, that is so cool!!

The Law of Diminishing Marginal Utility tells us that consumers will be willing to pay less for subsequent units of a good or service.

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It is responsible for the development of The Law of Diminishing Marginal Utility.

The value of a product in a market is determined by its marginal utility, not by its total utility.

On the one hand, the value of water is not determined by the total value of all water on the planet. Instead, it is determined by the

marginal utility of the very last gallon of water.

On the other hand, the total value of all the diamonds on the planet is not as large as it is for water. However, the value of

the last carat of a well-cut diamond is very high because there is so little of it.