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Economics 1021A/B Chapter Notes -Free Rider Problem, Marginal Utility, Social Cost

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

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Nicole Wallenburg
Economics
Mr. Parkin
Nov 1, 2011
Economics Textbook Notes
Classifying Goods and Resources
Goods, services, and resources differ in the extent to which people can be excluded form
consuming them and in the extent to which one person’s consumption rivals the
consumption of others.
Excludable
A good is excludable is it is possible to prevent someone from enjoying its
benefits
o People must pay to consume the good
o Example:
Brinks security service
A concert
A good is non-excludable if it is impossible (or extremely costly) to prevent
anyone from benefiting from it
o Example:
The services of the police, or fish in the Ocean
Rival
A good is rival if one person’s use of it does not decrease the quantity available
for someone else
o Example:
A fish can only be consumed once
A Brinks truck can’t deliver cash to two banks at the same time
A good is non-rival if one person’s use of it does not decrease the quantity
available for someone else
o One person’s benefit doesn’t lower the benefit of others
o Example:
The services of police
A concert on network television
A Fourfold Classification
Private Good
o Both a rival and excludable
A can of coke
Public Good
o Non-rival and non-excludable
o Can be consumed simultaneously by everyone, and o one can be excluded
from enjoying its benefits
National defence
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Nicole Wallenburg
Economics
Mr. Parkin
Nov 1, 2011
Common Resources
o Rival and non-excludable
o Can be used only once but no one can be prevented from using what is
available
Ocean fish
Natural Monopoly
o Economies of scale exist over the entire range of output for which there is
a demand. A special case of natural monopoly arises when the good or
service can be produced at zero marginal cost.
o Such a good is non-rival. If it is also excludable, it is produced by a
natural monopoly
Internet and cable television
Public Goods
National Defence is a public good non-excludable and non-rival and it has a free-rider
problem.
Free-Rider
A free rider enjoys the benefits of a good or service without paying for it. Because 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.
The free-rider problem is that the market would provide an inefficiently small quantity of
a public good.
Marginal Social Benefit of a Public Good
A person’s marginal benefit from a public good, like that from a private good, diminishes
as the quantity of the good increases the marginal benefit curve slopes downwards.
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 curves
Marginal Social Cost of a Public Good
The marginal social cost of a public good is determined in exactly the same was as that of
a private good
The principle of increasing marginal cost applies to the marginal cost of a public
good and the marginal social cost curve of a public good slopes upward
Efficient Quantity of a Public Good
If marginal social benefit exceeds marginal social cost, resources can be used
more efficiently by increasing the quantity
If marginal social cost exceeds marginal social benefit, resources can be used
more efficiently be decreasing the quantity
If marginal social cost equals marginal social benefit, resources are allocated
efficiently
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