ECO100Y1 Lecture Notes - Free Rider Problem, Marginal Cost, Fixed Cost

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10 Feb 2014
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Topic 15 the role of government (jan 24th) Outline: overview, public and private goods, example: lighthouse, excise taxes and allocative efficiency, regulating a natural monopoly, distribution of income. Where there is no point for a lot of firms present in the market; Public and private goods: two characteristics of goods. - excludability: a person can be excluded from using the goods; - rivalness: one person"s use of good diminishes other people"s use: pure private goods. - e. g. national defense; criminal justice system key result: private market cannot produce public goods; (because market failure & free rider problems) - light house is a public good: non-excludable & non-rival; - suppose: - value to each ship owner: ,000; Total value > cost efficient to build: lighthouse built in private market. - entrepreneur requires (m/2,000) from each owner; - yet no owner will pay, since cannot be excluded from benefit of lighthouse, once built (so not paying is considered a rational decision);

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