INVISIBLE HAND: If society wants x and people are willing to pay, businesses have the
incentive to produce
● Market failure: a situation in whcih the free market system fails to satsify society (invis
hand doesn't work)
○ Gov't called upon to satisfy society's wants (allocate efficiently)
○ 4 MARKET FAILURES
1. Public goods
2. Externalities
3. Monopolies
4. Unequal distribution of income
Public sector: part of economy that is controlled by gov't
● Little opporutnity to earn private profit
Private sector: part of economy run by private individuals + companies seeking profit
TYPES OF GOODS
Excludable: suppliers of the good can prevent people who don't pay from consuming it
Nonexcludable: the supplier cannot prevent consumption by people who do not pay for it
Rival in consumption: the same unit of the good cannot be consumed by more than one person
at a time
Nonrival in consumption: the same unit of the good can be consumed by more than one person
at a time
FOUR TYPES OF GOODS
Rival in consumption Nonrival in consumption
Excludable PRIVATE GOODS ARTIFICIALLY SCARCE GOODS
● Wheat ● Pay-per-view movies
● Bathroom fixtures ● Computer software
Non-excludable COMMON RESOURCES PUBLIC GOODS
● Clean water ● Public sanitation
● Biodiversity ● National defense
● Fire protection
, NONEXCLUDABLE GOODS = INEFFICIENTLY LOW PRODUCTION
b/c even if consumers would benefit from inc. production, no one will pay for more bc it
is available even with a paywall, and no one will supply it
● Free-rider problem: if a good is nonexcludable, no consumer will pay for it — they'll
take a free ride on someone who DOES
○ Solutions:
■ Punish the rider
■ Use tax $$$ to provide the service to everyone
NONRIVAL IN CONSUMPTION = INEFFICIENTLY LOW CONSUMPTION
b/c who is going to pay if they can enjoy it either way (aren't competing with anyone to
get the good, like in an auction, doesn't need to give up money to experience), why would
they pay/consume the packaged "good"
● When consumers must pay P > 0 for a nonrival in consumption good, P > MC = 0
Private Goods
PRIVATE GOODS (RIVAL + EXCLUDABLE) = EFFICIENTLY PRODUCED AND
CONSUMED
● Excludable = can charge + have incentive to produce
● Rival in consumption = consumers will pay a price = a price equal to MC of production
Public Goods (ex. public sewage system, sceintnfic research)
PUBLIC GOODS (NONRIV AND NONEXCLU) = INEFFICIENTLY LOW PRODUCTION
AND CONSUMPTION
Providing public goods
1. Voluntary contributions
a. Donations
2. Self-interested individuals + firms that make $ indirectly
a. TV supported by advertising
b. Skews nature + quantity of public goods supplied = additional costs on consumers
i. ex. consumers have to suffer through ads
3. Taxation
a. National defense
b. Legal system
c. Fire protection
incentive to produce
● Market failure: a situation in whcih the free market system fails to satsify society (invis
hand doesn't work)
○ Gov't called upon to satisfy society's wants (allocate efficiently)
○ 4 MARKET FAILURES
1. Public goods
2. Externalities
3. Monopolies
4. Unequal distribution of income
Public sector: part of economy that is controlled by gov't
● Little opporutnity to earn private profit
Private sector: part of economy run by private individuals + companies seeking profit
TYPES OF GOODS
Excludable: suppliers of the good can prevent people who don't pay from consuming it
Nonexcludable: the supplier cannot prevent consumption by people who do not pay for it
Rival in consumption: the same unit of the good cannot be consumed by more than one person
at a time
Nonrival in consumption: the same unit of the good can be consumed by more than one person
at a time
FOUR TYPES OF GOODS
Rival in consumption Nonrival in consumption
Excludable PRIVATE GOODS ARTIFICIALLY SCARCE GOODS
● Wheat ● Pay-per-view movies
● Bathroom fixtures ● Computer software
Non-excludable COMMON RESOURCES PUBLIC GOODS
● Clean water ● Public sanitation
● Biodiversity ● National defense
● Fire protection
, NONEXCLUDABLE GOODS = INEFFICIENTLY LOW PRODUCTION
b/c even if consumers would benefit from inc. production, no one will pay for more bc it
is available even with a paywall, and no one will supply it
● Free-rider problem: if a good is nonexcludable, no consumer will pay for it — they'll
take a free ride on someone who DOES
○ Solutions:
■ Punish the rider
■ Use tax $$$ to provide the service to everyone
NONRIVAL IN CONSUMPTION = INEFFICIENTLY LOW CONSUMPTION
b/c who is going to pay if they can enjoy it either way (aren't competing with anyone to
get the good, like in an auction, doesn't need to give up money to experience), why would
they pay/consume the packaged "good"
● When consumers must pay P > 0 for a nonrival in consumption good, P > MC = 0
Private Goods
PRIVATE GOODS (RIVAL + EXCLUDABLE) = EFFICIENTLY PRODUCED AND
CONSUMED
● Excludable = can charge + have incentive to produce
● Rival in consumption = consumers will pay a price = a price equal to MC of production
Public Goods (ex. public sewage system, sceintnfic research)
PUBLIC GOODS (NONRIV AND NONEXCLU) = INEFFICIENTLY LOW PRODUCTION
AND CONSUMPTION
Providing public goods
1. Voluntary contributions
a. Donations
2. Self-interested individuals + firms that make $ indirectly
a. TV supported by advertising
b. Skews nature + quantity of public goods supplied = additional costs on consumers
i. ex. consumers have to suffer through ads
3. Taxation
a. National defense
b. Legal system
c. Fire protection
