Upcoming in Class Group Quiz Thursday Homework #2 Due Next Thursday Exam #1 Next Thursday Writing Assignment Due Oct. 27th
Max. Net Benefit from Pollution MB, MC of Pollution Marginal Cost Marginal Benefit Quantity of Pollution in Tons Socially Efficient Level of Pollution
Market for Electricity with Externalities Price of Good Marginal Social Cost Marginal Private Cost P* P Ps2 Demand Quantity of Good Q1 Q2
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
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.
Public Goods • Non-excludable and non-rivalrous (indivisble) • Biological diversity • Genetic diversity • Charming landscapes • Intellectual property? • What is the efficient level of a public good? • Marginal cost = marginal benefits.
Individual A Individual B Total Benefit 10 P=10-2q P=8-2q 8 5 4 • Public Goods Problem • Suppose there are two people in a community who benefit from river preservation and the biodiversity created by it.
Public Goods 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 Goods Problem • What are the community’s total benefits from river preservation? • Suppose the marginal cost of river preservation is MC=2q. • What is the socially optimal level of river preservation? • How much would each individual pay? • Why might river preservation be difficult to implement?
Tragedy of the Commons Typically, the pricing system requires charging a different price to each consumer. Consumers may not choose to reveal the strength of their preferences. Due to non-excludability consumers still receive the benefits, giving them more reason to not reveal their preferences. This diminishes the incentive to contribute.
Public Goods • Typically the market undersupplies public goods. Why? • Free-riders –someone who derives benefits from a commodity without contributing to its supply.
Upcoming in Class Group Quiz Next Thursday Writing Assignment Due Oct. 27th