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Chapter 17

Economics 1021A/B Chapter Notes - Chapter 17: Marginal Utility, Rational Ignorance, Marginal Cost


Department
Economics
Course Code
ECON 1021A/B
Professor
Michael Parkin
Chapter
17

Page:
of 7
Chapter 17- Classifying Goods and Resources
Excludable
a good is excludable if it is possible to prevent someone from enjoying its benefits
a good is nonexcludable if it is impossible or extremely costly to prevent anyone from
benefitting from it
Rival
a good is rival if one person’s use of it decreases the quantity available for someone else
a good is nonrival if one person’s use of it does not decrease the quantity available for
someone else
A Fourfold Classification
PRIVATE GOODS
rival and excludable i.e. can of coke
PUBLIC GOODS
nonrival and nonexcludable, can be consumed simultaneously by everyone and no one can be
excluded from enjoying its benefits i.e. national defense
COMMON RESOURCES
rival and nonexcludable
unit of common resource can be used only once, but no one can be prevented from using it i.e.
ocean fish
NATURAL MONOPOLIES
economies of scale exist over the entire range of output for which there is a demand
special case 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 i.e. internet
Public Goods
The Free-Rider Problem
a free rider enjoys the benefits of a good or service without paying for it
a public good is provided for everyone to use and no one can be excluded from its benefits, no
one has an incentive to pay his or her share of the cost
free-rider problem is that the market would provide an inefficiently small quantity of a public
good
marginal social benefit from the public good would exceed its marginal social cost, deadweight
loss would occur
Marginal Social Benefit of a Public Good
a person’s marginal benefit from a public good diminishes as the quantity of the good
increases, marginal benefit curve slopes downward
because everyone gets the same quantity of a public good, its marginal social benefit curve is
the sum of the marginal benefits of all individuals at each quantity- it is the vertical sum of the
individual marginal benefit curve
contrast the marginal social benefit curve for a public good with that of a private good
to obtain marginal social benefit curve for a private good, sum the quantities demanded by all
individuals at each price, we sum the individual marginal benefit curve horizontally
Marginal Social Cost of a Public Good
marginal social cost of a public good is determined in exactly the same way as that of a private
good
principle of increasing marginal cost applies
Efficient Quantity of a Public Good
to determine the efficient quantity of a public good, find the quantity at which marginal social
benefit equals marginal social costs
if marginal social benefit exceeds marginal social cost, resources can be used more efficiently
by increasing the quantity
extra benefit exceeds the extra cost
if marginal social benefit equals marginal social cost, resources cannot be used more
efficiently
to provide more it would cost more than the additional coverage is worth and to provide fewer
lowers the benefit by more than its cost saving
Inefficient Private Provision
could a private firm deliver the efficient quantity of satellites?
it couldn’t because no one would have an incentive to buy his or her share of the satellite
system
private provision is inefficient
Efficient Public Provision
competition in the political marketplace results in the efficient provision of a public good
THE PRINCIPLE OF MINIMUM DIFFERENTIATION
tendency for competitors to make themselves similar to appeal to the maximum number of
clients or voters is called the principle of minimum differentiation
describes the behaviour of political parties
for the political process to deliver the efficient outcome that you’ve just seen, voters must be
well informed, evaluate the alternatives and vote in the election
political parties must be well informed about voter preferences
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
in the case of satellites, bureaucrats in the Department of National Defense (DND) must
cooperate
OBJECTIVE OF BUREAUCRATS
bureaucrats want to maximize their department’s budget because a bigger budget brings
greater status and more power
DND’s objective is to maximize defense budget
won’t overproducing satellites cost future votes? it will if voters are well informed and know
what is best for them
but voters might not be well informed and well-informed interest groups might enable the
DND
RATIONAL IGNORANCE
it is rational for a voter to be ignorant about an issue unless that issue has a perceptible effect
on the voters economic welfare
rational ignorance is the decision not to acquire information because the cost of doing so
exceeds the expected benefit
voters remain relatively uninformed about the technicalities of defense issues
voters who own for work for firms that produce satellites have a direct personal interest in
defense because it affects their incomes and careers
these voters have an incentive to become well informed about defense issues and to operate a
political lobby aimed at furthering their own self-interests
informed voters who produce that public good exert a larger influence than do the relatively
uninformed voters who only use the public good
when the rationality of the uninformed voter and special interest groups are taken into account,
the political equilibrium provides public goods in excess of the efficient quantity
Two Types of Political Equilibrium
SOCIAL INTEREST THEORY
predicts that governments make choices that achieve an efficient provision of public goods
this outcome occurs in a perfect political system in which voters are fully informed about the
effects of policies
PUBLIC CHOICE THEORY
predicts that governments make choices that result in inefficient overprovision of public goods
this outcome occurs in political markets in which voters are rationally ignorant and base their
votes only on issues that they know affect their own net benefit
voters pay more attention to their self-interests
public officials also act in their own self-interest
result is government failure
Why Government is Large and Growing
government grows in part because the demand for some public goods increases at a faster rate
than the demand for private goods
two possible reasons