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

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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### EEP 101/Econ 125 Clubs and Congestion: Lecture 10

David Zilberman

UC Berkeley

• 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)

• 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-

• 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

• 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)

• 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 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.

• 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