Economics of the Public Sector公共部门经济学.pptVIP

Capitalism is associated with limited government, but government is necessary for three reasons: Establish and maintain legal system to protect property rights. Promote equity in the distribution of income and wealth. Correct inefficiencies that arise from markets (externalities, public goods, and monopoly power). Public Finance/Choice is the area of economics that studies the public sector. Incentives are different in markets versus political sphere– in capitalism preference are revealed with purchases versus votes. Efficiency in competitive markets occurs where MB=MC. Where MB= private (max.) willingness to pay and MC= private (min.) willingness to sell. More correctly, society will see the outcome as efficiency where marginal social benefits = marginal social costs. Externalities drive a wedge between private and social benefits and private and social costs. Copyright ? 2004 South-Western Quantity of Aluminum 0 Price of Aluminum Equilibrium MB=MC Demand (private value) Supply (private cost) QMARKET Externalities are benefits (costs) received (borne) by neither the seller or the buyer but by third parties. Private benefits + external benefits = social benefits Private costs + external costs = social costs Since external benefits and costs are not perceived by buyers and sellers they are not captured in markets. Therefore, markets may fail to allocate resources inefficiently. Marginal social costs are greater than marginal private costs. Pollution is a cost that may not be borne by sellers, but it is a cost nonetheless to society. Private markets will overproduce (devote too many resources) to the production of goods with negative externalities. External costs and the supply curve. Missing the extra costs, markets generate an outcome where MSC MSB, signal that decreasing output will increase net social benefits. Is zero pollution efficient? Copyright ? 2004 South-Western Equilibrium Quantity of Aluminum 0 Price of Aluminum Demand (private value) MPB=MPB Sup