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Upcoming in Class. 1 st Group Quiz - Monday Sept. 10 th Homework #2 Due Sept. 17 Exam #1 Sept. 17 Chapters 1, 3, 4, 6. Writing Assignment Due Oct. 24th. Private Goods. Rivalrous. Common Goods. Fish, hunting game, grazing land . Food, clothing, toys, cars. Non-Excludable.

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Upcoming in class
Upcoming in Class

  • 1stGroup Quiz - Monday Sept. 10th

  • Homework #2 Due Sept. 17

  • Exam #1 Sept. 17

    • Chapters 1, 3, 4, 6.

  • Writing Assignment Due Oct. 24th


Private Goods

Rivalrous

Common Goods

Fish,

hunting game,

grazing land

Food, clothing, toys, cars

Non-Excludable

Excludable

Satellite television,

Golf courses,

Cinemas

National defense, lighthouses, clean air, information goods

Public Goods

Club Goods

Non-Rivalrous


Public goods
Public Goods

  • Non-excludable and non-rivalrous (indivisble)

    • Charming landscapes

    • Biological diversity

      • Number of Species

      • Species interdependence

      • Provides new sources of food, energy, industrial chemicals, raw materials, and medicines

    • Genetic Diversity

      • critical to species survival

      • Useful for cross-breeding to develop superior strains

    • Environmental quality

      • Healthy habitat for animals, clean air, clean water, clean soil


What is the efficient level of a public good
What is the efficient level of a public good?

  • Marginal cost = marginal benefits.

  • Typically the market undersupplies public goods.

  • Free-riders –someone who derives benefits from a commodity without contributing to its supply.


Demand for a public good
Demand for a Public Good

  • Graphically

    • non-rivalry means that

      • if each of several individuals has a demand curve for a public good,

      • then the individual demand curves are summed vertically to get the aggregate demand curve for the public good.


Public good problem
Public Good - Problem

  • Suppose there are two people in a community who benefit from river preservation and the biodiversity created by it.

  • Indvidual A has a WTP for river preservation of P=10-2q

  • Individual B has a WTP for river preservation of P=8-2q

  • q is defined as miles of river preservation

  • Suppose the marginal cost of river preservation is MC=2q.


Public good problem1
Public Good - Problem

  • How much would be produced if individual A were to pay for the river preservation?

  • Would individual B, then pay also for any river preservation?


Public good problem2
Public Good - Problem

  • What is the socially optimal level of river preservation?

  • How much would each individual pay?

  • Why might river preservation be difficult to implement?

  • What are the community’s total benefits from river preservation?


Public good example how not to save the rainforest
Public Good Example:How (Not) to Save the Rainforest


Non rivalrous good problem
Non-rivalrous Good Problem

  • The Illinois Power Authority is considering updating its transmission substations to use “smart-grid” technology, which improves reliability and efficiency in the electric grid. Each time a new smart-grid meter is installed Chicago, Naperville, and Rockford customers all benefit from increased reliability of their electricity. A study was done to determine the benefit to each city as follows:

    • Chicago – Marginal Benefit=10-0.5Q

    • Naperville – Marginal Benefit=5-0.5Q

    • Rockford – Marginal Benefit=10-1Q

  • What is the total marginal benefit when five smart-grid meters are installed?


Common good
Common Good

  • Rivalrous and non-excludable

  • Tragedy of the Commons

    • When a resource is non-excludable, individuals act independently and rationally consume with their own self-interest in mind. Ultimately, this will deplete the resource, even when it’s not in anyone’s best interest.



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