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Economics 1021A/B
Michael Parkin

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 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 Nicole Wallenburg Economics Mr. Parkin Nov 1, 2011 Inefficient Private Provision Everyone reasons, “my own private consumption will be greater if I free ride and do not pay my share of the cost of the public good. If I don’t pay, I enjoy the same level of the public good and I can buy more private goods.” Such reasoning is the free rider problem. If everyone reasons the same way, producers of public goods will have no revenue and therefore wont provide the public good Efficient Public Provision Competition is the political marketplace results in the efficient provision of a public good.  The Principle of Minimum Differentiation o The tendency for competitors to make themselves similar to appeal to the maximum number of clients or voters is called the principle of minimum differentiation  Fast-food restaurants cluster in the same block 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 o Bureaucrats want to maximize their department’s budget because a bigger budget b
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