Upcoming in Class Group Quiz Thursday

Homework #2 Due Next Thursday

Exam #1 Next Thursday

Writing Assignment Due Oct. 27th

Max. Net Benefit from PollutionMB, MC of Pollution

Quantity of Pollution in Tons

Marginal Cost

Marginal Benefit

Socially Efficient Level of Pollution

Market for Electricity with Externalities

Price of Good

Quantity of Good

Marginal Private Cost

Demand

Q2

Marginal Social Cost

Q1

P*

PPs2

ExcludableNon-Excludable

Non-Rivalrous

Rivalrous

Club Goods

Public Goods

Common Goods

Private Goods

Fish, hunting game, grazing land

National defense, lighthouses, clean air,

information goods

Food, clothing, toys, cars

Satellite television,Golf courses,

Cinemas

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.

Common Good - Problem

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.

Public Goods Problem• Suppose there are two people in a

community who benefit from river preservation and the biodiversity created by it.Individual A Individual B Total Benefit

8

5 4

P=10-2q P=8-2q10

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