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Lecture

Economics 1021A/B Lecture Notes - Private Good, Fish Farming, Marginal Utility

by

Department
Economics
Course Code
ECON 1021A/B
Professor
Michael Parkin

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Nicole Wallenburg
Economics
Mr. Parkin
Nov 2, 2011
Economics Lecture # 14
Classifying Goods and Resources
What is the difference between:
London Police department and Brinks security
Fish in the Atlantic Ocean and fish in a fish farm
A live concert and a concert on television
o These and all goods and services can be classified according to whether
they are excludable or non-excludable and rival or non-rival.
Excludable
A good is excludable if only the people who pay for it are able to enjoy its benefits.
Brinks security services, Cooke Aquaculture’s fish, and a live Coldplay concert
are examples.
Non-excludable
A good is non-excludable if no one can be prevented from enjoying its benefits.
The services of the London police, fish in the Atlantic Ocean, and a concert on
network television are examples.
Rival
A good is rival if one person’s use of it decreases the quantity available for someone else.
A Brinks truck can’t deliver cash to two banks at the same time. A fish can be
consumed only once.
Non-rival
A good is non-rival if one person’s use of it does not decrease the quantity available for
someone else.
The services of the London police and a concert on network television are non-
rival.
A Four-Fold Classification
Private Goods
o A private good is both rival and excludable.
A can of Coke and a fish on Cooke’s Aquaculture farm are
examples of private goods.
Public goods
o A public good is both non-rival and non-excludable. Everyone can
consume a public good simultaneously and no one can be excluded from
its benefits.
National defense is the best example of a public good.
Common Resources
o A common resource is rival and non-excludable.

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Nicole Wallenburg
Economics
Mr. Parkin
Nov 2, 2011
o A unit of a common resource can be used only once, but no one can be
prevented from using what is available.
Ocean fish are a common resource.
They are rival because a fish taken by one person isn’t available
for anyone else.
They are non-excludable because it is difficult to prevent people
from catching them.
Natural Monopolies
o In a natural monopoly, is a producer who can serve the entire market at a
lower cost than two or more firms can.
o Natural monopoly arises when the good or service can be produced at zero
marginal cost. Such a good is nonrival. If it is also excludable, it is
produced by a natural monopoly.
The Internet and cable television are examples.
Public Goods
The Free-Rider Problem
A free rider enjoys the benefits of a good or service without paying for it.
Because no one can be excluded from the benefits is a public good, everyone has
an incentive to free ride.
Public goods create a free-rider problemthe absence of an incentive for
people to pay for what they consume.
o The value of a private good is the maximum amount that a person is
willing to pay for one more unit of it.
o The value of a public good is the maximum amount that all the people are
willing to pay for one more unit of it.
To calculate the value placed on a public good, we use the
concepts of total benefit and marginal benefit.

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Nicole Wallenburg
Economics
Mr. Parkin
Nov 2, 2011
Marginal Social Benefit of a Public Good
Total benefit is the dollar value that a person places on a given quantity of a good.
The greater the quantity of a good, the larger is a person’s total benefit.
Marginal benefit is the increase in total benefit that results from a one-unit
increase in the quantity of a good.
o The marginal benefit of a public good diminishes with the quantity of the
good provided.
Figure 17.2 shows that the marginal social benefit
of a public good is the sum of marginal benefits of
everyone at each quantity of the good provided.
Part (a) shows Lisa’s marginal benefit.
Part (b) shows Max’s marginal benefit.
The economy’s marginal social benefit of a public
good is the sum of the marginal benefits of all
individuals at each quantity of the good provided.
The economy’s marginal social benefit curve for a
public good is the vertical sum of all individual
marginal benefit curves.
The marginal social benefit curve for a public good
contrasts with the demand curve for a private good,
which is the horizontal sum of the individual
demand curves at each price.
The Marginal Social Cost of a Public Good
The marginal social cost of a public good is determined in the same way as that of a
private good.
The Efficient Quantity of a Public Good
The efficient quantity of a public good is the quantity that at which marginal social
benefit equals marginal social cost.
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