Topic 9: Public goods
1. Public goods definition: individuals cannot be excluded from the use of good.
Some of the examples would be: fresh air, national defense, park, etc.
2. For a normal market, we horizontally add individual’s demand curve to get the
market demand curve. See graph in lecture
3. For a market with public good, we vertically add the individual’s demand curve.
See graph in lecture
4. Free rider effect: A situation where an individual or organization is able to benefit
from the actions of another without contributing to the cost associated with such
Questions To be asked:
1. Calculate the optimum amount to be consumed
- Obtain total utility function for the economy
- Use MU = P to derive the market demand curve
- Set market demand = market supply, solve for the equilibrium quantity and
2. Calculate the gain to society by consuming the public goods
- Gain comes from suppliers and consumers
- Total gain to society = consumer surplus + producer’s profit
- Recall: consumer surplus = total utility – total expenditure
producer profit = total revenue – total cost Sample Question:
Fall 2010 Final Exam, Question 22-24:
Solution: G D B Topic 10: Externality
1. Definition of externality: the total cost on producing a particular product is more
than what the producers have incurred, e.g., pollution on manufacturing glass
2. Marginal external cost should be added to the marginal cost, thus marginal cost to
society (MSC) is the curve we should use to determine the optimal point.
Government can help achieving the optimal cost on levying a tax, thus the equilib