ECON 2 Lecture Notes - Lecture 29: Economic Surplus, Private Good, Demand Curve
Jeff Koo
Econ 2
Principles of Economics
Spring 2019
4 Units
Market Failures: Public Goods and Externalities
Market Failures in Competitive Markets
● Demand-Side Market Failure: happens when demand curves do not reflect consumers’
full willingness to pay for a good or service
● Supply-Side Market Failure: occurs when supply curves do not reflect the full cost of
producing a good or service
Efficiently Functioning Markets
Two Conditions must hold if a competitive market is to produce efficient outcomes:
1. The demand curve in the market must reflect consumers’ full willingness to pay
2. The supply curve in the market must reflect all the costs of production
● Consumer Surplus: the difference between the maximum price a consumer is willing to
pay for a product and the actual price that they do pay
● Producer Surplus: the difference between the actual price a producer receives and the
minimum acceptable price that a consumer would have to pay the producer to make a
particular unit of his or her product
○ A producers minimum acceptable price for a particular unit will equal the
producer’s marginal cost of producing that particular unit
Public Goods
● Private Goods Characteristics – two characteristics:
○ Rivalry: when one person buys and consumes a product, it is not available for
another person to buy and consume. When Adams purchases and drinks a bottle
of mineral water, it is not available for Benson to purchase and consume
○ Excludability: sellers can keep people who do not pay for a product from
obtaining its benefits. Only people who are willing and able to pay the market
price for bottles of water can obtain these drinks and the benefits they confer
● Private goods are produced through the competitive market system and are offered for
sale
● Public Goods Characteristics – two characteristics:
○ Nonrivalry: one person’s consumption of a good does not preclude consumption
of the good by others. Everyone can simultaneously obtain the benefit from a
public good such as national defense, street lighting, etc
○ Nonexcludability: no effective way of excluding indiviudals from the benefit of
the good once it comes into existence. Once in place, you cannot exclude
someone from benefiting from national defense, street lighting, etc
● Public goods are provided by government and offered for free
● Cost-Benefit Analysis: deciding whether to provide a particular public good and how
much of it to provide
Document Summary
Demand-side market failure: happens when demand curves do not reflect consumers" full willingness to pay for a good or service. Supply-side market failure: occurs when supply curves do not reflect the full cost of producing a good or service. Consumer surplus: the difference between the maximum price a consumer is willing to pay for a product and the actual price that they do pay. Producer surplus: the difference between the actual price a producer receives and the minimum acceptable price that a consumer would have to pay the producer to make a particular unit of his or her product. A producers minimum acceptable price for a particular unit will equal the producer"s marginal cost of producing that particular unit. Rivalry: when one person buys and consumes a product, it is not available for another person to buy and consume. When adams purchases and drinks a bottle of mineral water, it is not available for benson to purchase and consume.
