Capital, interest, and corporate finance ...

Christian,

This topic should finish up the course --- WOW, last chapter! Just want to say that you did so well this semester as microeconomics is one of those courses that tends to "weed out" the non-serious students, and you worked hard, stayed on task, and got good grades. OK, great grades!

So awesome!

I'll come back to this topic in the next day or two, and until then ...

Love you, and keep studying,
mom

Market Failure --- Government Failure

An aside:

Economists and others can be fully aware of market failures and still be in favor of the market system anyway. Why? Because of government failures, such as lags in identification, decision-making, implementation, etc., not enough information or no incentive to correct the problem, the recognition of unintended consequences, etc., etc., etc.

Market Failure --- Public Goods

Remember the two essential characteristics of pure public goods:


1. non-excludability meaning that no one (not even "non-payers" or what's referred to as "free-riders") can be excluded from consuming the good or service


2. Non-depletability meaning that an additional consumer won't diminish the amount left over for someone else


To be considered a pure public good, both characteristics must hold!


To see the difference between "public" and "private" goods, first consider a private good such as the purchase of a movie ticket. Since non-payers will not be allowed in the theater, non-payers (i.e., free-riders) are excluded from consuming the good; therefore, the non-excludability characteristic does not hold.

Also with private goods, such as a new automobile or a stereo, when someone makes a purchase, there is one less car or stereo left over to sell to someone else; therefore, the non-depletablity characteristic does not hold.


Can you think of a good or service for which only one of the two above characteristics holds? Name any examples that you can think of.

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Now consider public tv and radio, both good examples of public goods. Can anyone be excluded from watching public tv or listening to public radio? Does the non-excludability characteristic hold?

If one more person turns on their radio or tv, is there less product available for others? Does the non-depletability characteristic hold?

Can you name some other examples of public goods? There are several.

Market Failure --- Externalities

Christian,

I know you're focused on this topic right now; however, I wrote some things about it earlier on 3/2/10. Positive externalities generally lead to a discussion of public goods, the next topic discussed here on 4/18/10.

Much love,
mom

marginal benefit = marginal cost

An aside:

By this point, it should be clear that all optimal decisions involve setting marginal cost equal to the marginal benefit. Why?
Consider the following .......

If marginal benefit > marginal cost, then it's better to increase production (or consumption)
If marginal benefit < marginal cost, then it's better to decrease production (or consumption)
So, only when marginal benefit = marginal cost, there is no further tendency to make changes ..... and thus the situation is considered to be in equilibrium whether it's the input market, output market, etc. Not convinced that MB = MC is the best outcome? Reread the chapter on perfect competition and remember that this result applies to optimal decisions (production, consumption, number of hours to work, etc.) assuming no externalities. If negative externalities exist, and the MSC > MPC, then the optimal outcome is met when MB = MSC.

[Note: MPC = marginal private cost, MSC = marginal social cost, and MSC > MPC if there are negative externalities]