eep 101 econ 125 clubs and congestion lecture 10
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EEP 101/Econ 125 Clubs and Congestion: Lecture 10

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EEP 101/Econ 125 Clubs and Congestion: Lecture 10. David Zilberman UC Berkeley. Clubs and congestion. Clubs- organizations that form to provide excludable goods with Non rivalry Congestion- utility declines with number of users

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clubs and congestion
Clubs and congestion
  • Clubs- organizations that form to provide excludable goods with
    • Non rivalry
    • Congestion- utility declines with number of users
  • B(N,X) Benefits depend on amenity size X and number of users N.
    • d B(N,X) /dN<0
    • d B(N,X) /dX>0
  • c(X) Cost increases with X
  • If costs are shared a member choice is
    • MAX B(N,X)-c(X)/N which is equivalent to
    • Max N* B(N,X)-c(X)
clubs optimal size
Clubs:Optimal size
  • Socail Optimality problem
  • Optimal decision rules

N*MBX=MCX

Marginal benefits of quantity

To N members

=Marginal cost

N*MB=Benefits of the marginal member=Extra congestion cost it inflicts= -N*MBN-

club a numerical example i
Club a numerical example I
  • Benefit for an individual aX-bN
  • Cost cX+dX2
  • Optimal size Max N(aX-bN)- cX-dX2
  • FOC(X) aN-c-2dX=0 aN=2dX+c
  • Hence (1) aN-2dX=c alternatively
  • X=Na-c/2d This result is a public good result when N is fixed. But N is not it,it is determined according to
club a numerical example ii
Club a numerical example II
  • FOC(N) aX-bN-2bN=0
  • hence X/N=3b/a
    • High b( congestion cost) increases optimal X/N ratio
    • High a ( benefit of X) reduces optimal X/N ratio
  • X=N3b/a
    • Positive relation between N and X
  • Insert to 1 (aN-2dX=c)
  • (a-6db/a)N=c
  • N=ca/ (a-6db)
  • Higher cost of the good leads to a larger club
  • X=3Nbc/ (a-6db)
freedom to choose
Freedom to Choose
  • Clubs are established to accommodate people with different preferences.
  • Clubs with members with a high degree of preference for goods and high aversion to congestion, will charge a high membership fee and be exclusive.
  • Municipalities are also clubs.
  • Different communities have different combinations of services and taxes.
people choose with their feet
People choose with their feet.
  • People will relocate to locations that provide them with the optimal combination of environmental amenities, employment, congestion, and taxes.
  • Some people who prefer a high degree of services with high taxes, will join the appropriate community.
  • Therefore, uniform environmental policies have a disadvantage and when possible, communities will be allowed to establish their own standards.
  • But some environmental choices have implications that spill over nationally and globally.
  • Others impact future generations.
environmentalism federalism
Environmentalism & Federalism
  • The theory of public goods and externality are useful to determine what type of policies should be determined by global, federal, and municipal governments.
  • The federal government sometimes aims to establish minimum standards that apply to all populations and take into account a future generation.
  • Groups that have stronger preference than the average, may establish clubs to pursue their objectives.
  • The legal system is crucial in dividing responsibilities between various levels of government
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