2. • Explain the effects of positive and negative
externalities with the aid of supply and demand
analysis
• Discuss the policy options to correct for externalities
• Discuss the relative importance of property rights
and transaction costs in market-based approaches to
dealing with the problem of externalities
• Discuss cap-and-trade programmes
• Provide examples of global or regional public goods
and consider some of the relevant policy
implications.

3. • Distinguish between private, public, mixed, and merit
goods
• Derive the conditions for the optimal allocation of
private, public, and mixed goods with the aid of
supply and demand analysis
• Explain why competitive markets fail to provide
public and mixed goods efficiently
• Explain the distinction between the financing of
public goods and services and their physical
production
• Explain the concept of an externality
• Identify the main types of externalities.

4. • Can all goods and services be supplied efficiently by
competitive markets?
– Revealing consumer preferences
– Production
– Competition
• Characteristics of private goods:
– Rivalry in consumption
– Excludability.

6. • Non rivalry
– Marginal cost of adding consumers is zero
– Excluding consumers is Pareto-inefficient
• Non-excludablility.

8. Characteristic Public goods Private goods
Property rights Non-excludable Excludable
Consumption Non-rival Rival
Aggregate demand
curve
Vertical addition of
individual demand
curves
Horizontal addition of
individual demand
curves
Partial equilibrium
condition for optimum
provision
The sum of marginal
utilities equals
marginal cost
Marginal utility of each
consumer equals
marginal cost
Efficient pricing rule The sum of individual
prices equals marginal
cost
Price equals marginal
cost

9. • Free riding
• Perfect price discrimination vs taxation
• Production of public goods
• Financing of public goods.

10. Mixed goods
• Non-rival, excludable mixed goods and services
• Rival, non-excludable mixed goods and services
Merit goods
• External benefits to buying or receiving goods and
services.

11. • Positive externalities
• Negative externalities
• Technological actions
• Pecuniary actions.

14. • Pigouvian taxes and subsidies
• Regulation
– Command-and-control regulation
– Bureaux of Standards
– Regulatory measures
• Creation of markets
– “Cap-and-trade” programme
• Property rights
– Coase theorem
– Transaction costs.

15. • Joint responsibility/shared burden by neighbouring
countries
– Defence systems
– Cross border road and rail networks
– Air and water pollution
– Carbon dioxide emissions
• Bilateral and multilateral agreements
• Regional trade agreements
• International agreements.