ECON 1B03 Lecture Notes - Lecture 6: Economic Equilibrium, Externality, Price Ceiling
10 Jun 2018
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Common Resources
- We all share and enjoy common resources with others all the time
- For example, clean air and water, roads and highways, wildlife.
- However, our enjoyment of and possible overuse or misuse of these resources can diminish
others; ability to enjoy them
Externality of a Cow
- A long time ago there was a common ground for free use by farmers to bring their cows for
grazing
- Every additional cow a farmer brought cleared more grass that could have been enjoyed by
aother farer’s cow
- Each cow conferred a negative externality – less grass for other cows to eat
- If there eventually were so many cows that the grass literally became all eaten up, the common
pasture would be gone
- The farmer would and did lose out and many lost their livelihoods altogether
- This scenario is often called the tragedy of the common
o Individual farmers neglect the effect of their own cows on other farmers (the rest of
society)
- The governing locals could have prevented the destruction of the pasture in a couple of ways
o They could have set limits on the number of cows each farmer could have
o They could have assigned a certain amount of land to each farmer, in effect creating
private property for each farmer to maintain or neglect at their whim
Today
- Governments today try to avoid the tragedy of the commons
- They can tax polluters to reduce production and the pollution associated with it
- Toll roads prevent overuse and congestion by charging drivers who are willing to pay for the
benefit of less traffic (thus excluding drivers who do not pay and would potentially free-ride)
- Requiring licenses to hunt and dish and setting time limits to prevent overuse of natural
resources
- The federal government produces national defense, local governments provide police and hire
departments – private firms would not find it profitable to do so
Government Policies: Price Controls I
- Recall: in a free, unregulated market system, market forces establish equilibrium prices and
exchange quantities
- While equilibrium conditions may be efficient, it may be the case that not everyone in society is
satisfied and the government may want to get involved
- How will government policies affect supply and demand?
Price Controls
- The government will freeze prices at a predetermined level that they feel will make members of
society better off
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ECON 1B03 Full Course Notes
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Document Summary
We all share and enjoy common resources with others all the time. For example, clean air and water, roads and highways, wildlife. However, our enjoyment of and possible overuse or misuse of these resources can diminish others; ability to enjoy them. A long time ago there was a common ground for free use by farmers to bring their cows for grazing. Every additional cow a farmer brought cleared more grass that could have been enjoyed by a(cid:374)other far(cid:373)er"s cow. Each cow conferred a negative externality less grass for other cows to eat. If there eventually were so many cows that the grass literally became all eaten up, the common pasture would be gone. The farmer would and did lose out and many lost their livelihoods altogether. This scenario is often called the tragedy of the common. Individual farmers neglect the effect of their own cows on other farmers (the rest of society)
