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Chapter 17

Economics 1021A/B Chapter Notes - Chapter 17: Production Quota, Demand Curve, Social Cost

Course Code
ECON 1021A/B
Michael Parkin

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Economics Chapter 17 Notes Nov.
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: 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: 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

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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.

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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.
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