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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


Common Goods


hunting game,

grazing land

Food, clothing, toys, cars



Satellite television,

Golf courses,


National defense, lighthouses, clean air, information goods

Public Goods

Club Goods


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.