Upcoming in Class

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Upcoming in Class. Homework #1 Due Thursday Group Quiz Next Thursday Writing Assignment Due Oct. 28th. Homework 1. 1. What is the difference between a common good, a public good, and an open-access resource? Give examples of each. Homework 1.

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Upcoming in Class

Homework #1 Due Thursday

Group Quiz Next Thursday

Writing Assignment Due Oct. 28th

Homework 1

1. What is the difference between a common good, a public good, and an open-access resource? Give examples of each.

Homework 1

2. Suppose the state of Illinois is trying to decide how many miles of the Vermillion River should be preserved in its natural state. It has been determined that 100 people will be affected by this decision and that the benefits derived by each individual are unaffected by the total number of people affected by the project. Each individual has the same inverse demand function for river preservation, which can be written as P = 10 - 1Q, where Q is the number of miles of the river that are preserved. The marginal cost of each mile of river preservation is constant and equal to \$300.

a) Write the inverse supply function for river preservation.

b) Use the number of affected people, the inverse demand function, and the inverse supply function to determine the efficient amount of river preservation (in miles).

c) Calculate the net benefits from river preservation.

d) Develop a list of the possible benefits and costs of river preservation.

Homework 1

3. What is willingness to pay (WTP)? What is your WTP for a dozen eggs from Meijer? What is your WTP for a dozen farm fresh eggs from organically raised free-range chickens? Explain why they are different (or the same).

Homework 1

4. Assume a change in the quality of a good results in an increase in consumers’ willingness to pay. Assume also that the supply of the good is unchanged. Illustrate this situation graphically and identify the change in net benefits attributable to the change in quality.

Bio-Diversity
• Genetic Diversity
• critical to species survival
• Useful for cross-breeding to develop superior strains
• Number of Species
• Species interdependence
• Provides new sources of food, energy industrial chemicals, raw materials, and medicines
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?
Example of Public Good
• There are two people in the world
• They both benefit from preserving the rainforest, with an inverse demand function
• P=50-2Q
• Preservation is a public good
• The marginal cost of preserving the rain forest is \$20 per acre.
• Estimate total demand, and the optimal number of acres to preserve.
Well-Defined Property Rights and Public Goods
• Exclusivity –
• All benefits and costs accrued as a result of owning and using the resources should accrue to the owner, and only the owner, either directly or indirectly by sale to others
• Transferability –
• Enforceability –
Coase Theorem
• If property rights are well-defined, and no significant transaction costs exist, an efficient allocation of resources will result even with externalities.
Coase Example
• .Two pieces of land that are adjacent.
• Farmer McDonald grows crops worth \$6,000.
• Farmer Brown’s land is on a swamp. Farmer Brown drains the swamp and can grow crops on his land worth \$2,000. As a result McDonald’s land flood and destroys his crop.

Coase Theorem Problem

• A chemical factory is situated next to a farm. Airborne emissions from the chemical factory damage crops on the farm. The marginal benefits of emissions to the factory and the marginal costs of damage to the farmer are as follows
• MB= 360 – 0.4 Q and MC=90+0.2Q
• From an economic viewpoint, what is the best solution to this environmental conflict of interest?
• How might this solution be achieved?
Upcoming in Class

Group Quiz Next Thursday

Writing Assignment Due Oct. 27th