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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 • 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 • 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? • 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 • 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 • 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 - 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 - 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 • 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 • 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.
