ECON 211 Chapter 11 Gov Solutions to Externalities and Market Failures

Command-and-Control Policies

Government mandates behavior

Disadvantage of command-and-control policies

knowledge problem and preferences

Advantages of command-and-control policies

when success requires nearly full compliance

Corrective taxes

tax on a good with a negative externality

corrective subsidies

subsidy on a good with a positive externality

facilitate a market for externality

cap and trade policies (tradable permits)

buyers buy if 

wtp is greater than price

sellers sell if

oppurtunity cost is lower than price

excludability

one using a good can stop someone from using the good

rivalvous in consumption

one person using a good impairs another from using it

rivalvous and excludable good

private goods (clothes, bananas, housing)

rivalrous but not excludable

common resources (fishing in a public lake takes the good fish away for others)

not rivalrous, but excludable

club goods (private park)

not rivalrous nor excludable

public goods (air, national defense)

public goods can create what problem?

free-rider problem

free-rider problem

someone who receives benefit but avoids paying

solutions to free-rider problem

government intervention through tax, creative private solutions through ads, social norms through tipping

common resource can create what problem?

tragedy of the commons

tragedy of the commons

tendency of a common resource to be overused