Global Markets, Trade, and Public Goods

Global Markets and Trade

• The goods and services available for purchase and consumption are not limited by domestic production capabilities.
• Imports: Goods and services purchased from other countries.
  • Local demand is satisfied by goods and services produced overseas.
• Exports: Goods and services sold to other countries.
  • Overseas demand contributes to the demand for domestic products.

How Global Markets Work

• International Trade Drivers:
  • Comparative advantage based on differing opportunity costs between countries.
• National Comparative Advantage:
  • A nation's ability to perform an activity or produce a good/service at a lower opportunity cost than any other nation.

Public Goods

• Private Goods:
  • Defined as both rival (subtractable) and excludable.
• Public Goods:
  • Defined as both non-rival and non-excludable.

Public Goods and the Free-Rider Problem

• The Free-Rider Problem:
  • A situation where an individual benefits from a good or service without paying for it.
  • In public goods, no one can be excluded from the benefits, creating an incentive to free ride.
• The free-rider problem:
  • Occurs when individuals opt not to pay for a public good, enjoying a "free ride" at the expense of those who do pay.
  • The non-excludability of a public good results in undersupply due to loss of revenue.
  • Free-riders benefit from positive externalities created by the choices of others to pay.
  • Under positive externalities, the equilibrium quantity falls short of the level that maximizes total surplus (efficiency).

Solutions to the Free-Rider Problem and Market Failure

• Undersupply of public goods leads to inefficient production and consumption quantities.
  • Examples: public radio, public TV, Giving Tuesday.
• Solutions to this market failure:
  • Social norms
  • Government regulation and provision
  • Private property rights