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EEP 101/Econ 125 Clubs and Congestion: Lecture 10PowerPoint Presentation

EEP 101/Econ 125 Clubs and Congestion: Lecture 10

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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

- 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

- 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

- 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

- 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 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

- 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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