Class Notes (837,698)
Canada (510,399)
Economics (951)
Lecture

Lecture #14 - Nov 2.docx

9 Pages
57 Views
Unlock Document

Department
Economics
Course
Economics 1021A/B
Professor
Michael Parkin
Semester
Fall

Description
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.Private goods Food and drink Rival Car House Natural monopolies Internet Nonrival Cable television Bridge or tunnel Excludable Common resources Fish in ocean Atmosphere City parks Public goods National defence The law Air-traffic control Nonexcludable Private goods Food and drink Rival Car House Natural monopolies Internet Nonrival Cable television Bridge or tunnel Excludable Common resources Fish in ocean Atmosphere City parks Public goods National defence The law Air-traffic control Nonexcludable 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 problem—the 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. 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. Nicole Wallenburg Economics Mr. Parkin Nov 2, 2011  Figure 17.3 illustrates the efficient quantity of a public good.  With fewer than 2 satellites, MSB exceeds MSC.  Resources a can be used more efficiently by increasing the quantity.  With more than 2 satellites, MSC exceeds MSB.  Resources can be used more efficiently if fewer satellites are provided.  So the quantity at which MSB = MSC, resources are used efficiently.  Private production would produce 0 satellites. Inefficient Private Provision If a private firm tried to produce and sell a public good, almost no one would buy it. The free-rider problem results in too little of the good being produced. Efficient Public Provision Because the government can tax all the consumers of the public good and force everyone to pay for its provision, public provision overcomes the free-rider problem.  If two political parties compete, each is driven to propose the efficient quantity of a public good.  A party that proposes either too much or too little can be beaten by one that proposes the efficient amount because more people vote for an increase in net benefit.  Figure 17.4 illustrates the efficient political outcome.  Two parties, Doves and Hawks, agree on everything except the number of satellites.  If Doves propose 1 satellites and Hawks propose 3, voters are equally unhappy and the election is too close to call. Nicole Wallenburg Economics Mr. Parkin Nov 2, 2011  If Doves increase the number of satellites to 2, it will win the election if Hawks propose 3.  If Hawks decrease the number of satellites to 2, it will win the election if Doves propose 1.  Both parties propose 2 satellites and each party gets 50 percent of the votes.  Principle of Minimum Differentiation o The attempt by politicians to appeal to a majority of voters leads them to the same policies—an example of the principle of minimum differentiation. o The
More Less

Related notes for Economics 1021A/B

Log In


OR

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


OR

By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.


Submit