ME11--Ch_1_. 20.pptVIP

ECONOMICSFOR MANAGERS By Mark Hirschey Public Policy Chapter 20 Chapter 20OVERVIEW Externalities Solving Externalities Public Goods Benefit?Cost Concepts Benefit-Cost Criteria Additional Methods for Improving Public Management Regulatory Reform in the New Millennium Health?Care Reform Chapter 20KEY CONCEPTS negative externality positive externality internalize the externality Pigovian taxes command-and-control regulation transactions costs Coase Theorm public good nonrival consumption private good rival consumption nonexclusion concept exclusion concept common resources tragedy of the commons free?rider problem hidden preferences problem Pareto satisfactory Pareto optimal potential Pareto improvement marginal social costs marginal external costs marginal private costs marginal social benefits marginal private benefits marginal external benefits social rate of discount social net present-value benefit?cost ratio analysis social internal rate of return cost?effectiveness analysis privatization Externalities Negative Externalities Air, noise, and water pollution are the most familiar negative externalities. Negative externalities cause overproduction because sellers do not consider all social costs. Positive Externalities Education generates positive externalities. Positive externalities cause underproduction because sellers cannot reflect the full social value of production in the prices charged. Solving Externalities Government Solutions Taxes are often used to correct negative externalities. Government sometimes controls the effects of externalities by regulation. Market Solutions Markets often provide effective penalties to moderate negative externalities. Markets can give incentives for the production of goods and services with positive externalities. Public Goods Rivalry and Exclusion Public goods are nonrival in consumption. Use by certain individuals does not reduce availability for others. Public goods tend to be nonexclusionary. It is often impos