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Chapter 17

Chapter 17 Textbook Notes

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Economics 1021A/B
Michael Parkin

Economics Chapter 17 Notes Nov. 2 Classifying Goods and Resources • Goods, services, and resources differ in the extent to which people can be excluded from consuming them and in the extent to which one person’s consumption rivals the consumption of others Excludable • Excludable: a good is excludable if it is possible to prevent someone from enjoying its benefits ○ Brinks security services, a concert • Nonexcludable: a good is nonexcludable if it is impossible (or extremely costly) to prevent anyone from benefiting from it ○ Fish in the ocean, the police Rival • Rival: a good is rival if one person’s use of it decreases the quantity available for someone else ○ A Brinks security truck can’t deliver cash to two person’s houses at the same time • Nonrival: a good is nonrival if one person’s use of it does not decrease the quantity available for someone else ○ Network television, services of the police A Fourfold Classification • Private goods ○ Private good: both rival and excludable  A can of coke • Public goods ○ Public good: both nonrival and nonexcludable  National defence • Common resources ○ Common resource: rival and nonexcludable  Ocean fish • Natural monopolies ○ A producer who can serve the entire market at a lower cost than two or more firms can ○ 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 Public Goods The Free-Rider Problem • A free rider enjoys the benefits of a good or service without paying for it • Free-rider problem: the market would provide an inefficiently small quantity of a public good would exceed its marginal social cost and a deadweight loss would arise\ Marginal social Benefit of a Public Good • Lisa and Max value national defense (see graph of their marginal benefits from a defense satellite) • A person’s marginal benefit from a public good, like that from a private good, diminishes as the quantity of a good increases- the marginal benefit curve slope downward • 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. Marginal Social Cost of a Public Good • Determined in exactly the same way as a private good • The principle of marginal cost applies to marginal cost of a public good and the marginal social cost curve of a public good slopes upward Efficient Quantity of a Public Good • Find the quantity at which marginal social benefit equals marginal social cost • If MSB exceeds MSC (when fewer than 2 satellites are provided) resources can be used more efficiently by increasing the quantity • If MSB equals MSC (when 2 satellites are produced) resources can’t be used more efficiently 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 Private Provision • Political process may be efficient or inefficient • 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 The Principle of Minimum Differentiation • Principle of Minimum differentiation: the tendency for competitors to make themselves similar to appeal to the maximum number of clients or voters • Describes the behaviour of political parties Inefficient Public Overprovision • If competition between two political parties is to deliver the efficient quantity of a public good, bureaucrats must cooperate and help to achieve this outcome Objective of Bureaucrats • Want to maximize their departments budget because a bigger budget brings greater status and more power • The DND might persuade the politicians that 2 satellites cost more than the originally budgeted amount or they might press its position more strongly and argue for more than 2 satellites Rational Ignorance • Rational ignorance: the decision not to acquire information because the cost of doing so exceeds the expected benefit • For voters who consume but don’t produce a public good, it is rational to be ignorant about the costs and benefit. • For voters who produce a public good, it is rational to be well informed. • When the rationality of uninformed voters and special interest groups is taken into account, the political equilibrium results in overprovision of a public good. • If rationally ignorant voters enable the bureaucrats to achieve their goal of maximizing their budget, public good might be overprovided and a deadweight loss created. Two Types of Political Equilibrium • Social Interest Th
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