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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
slide2

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?
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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