Transcript Lecture 2 - Illinois State University

 Group
Quiz Thursday
 Homework
 Exam
#2 Due Next Thursday
#1 Next Thursday
 Writing
Assignment Due Oct. 27th
MB, MC of
Pollution
Marginal
Cost
Socially Efficient
Level of Pollution
Marginal
Benefit
Quantity of
Pollution in
Tons
Price of
Good
Marginal
Social Cost
Marginal
Private Cost
P*
P
Ps2
Demand
Q1 Q2
Quantity of
Good
Common Goods
Fish,
hunting game,
grazing land
Rivalrous
Private Goods
Food, clothing, toys, cars
Non-Excludable
National defense,
lighthouses, clean air,
information goods
Public
Goods
Excludable
Satellite television,
Golf courses,
Cinemas
Non-Rivalrous
Club
Goods
 When
a resource is non-excludable,
individuals act independently and
rationally consume with their own selfinterest in mind. Ultimately, this will
deplete the resource.
Public
Goods
• Non-excludable and non-rivalrous (indivisble)
 Biological diversity
 Genetic diversity
 Charming landscapes
 Intellectual property?
• What is the efficient level of a public good?
 Marginal cost = marginal benefits.
 Public
Goods Problem
• Suppose there are two people in a community
who benefit from river preservation and the
biodiversity created by it.
Individual A
10
Individual B
P=10-2q
P=8-2q
8
5
4
Total Benefit
Public
Goods Problem
• How much would be produced if individual A
were to pay for the river preservation?
• Would individual B, then pay also for any river
preservation?
 Public
Goods Problem
• What are the community’s total benefits from
•
•
•
•
river preservation?
Suppose the marginal cost of river preservation
is MC=2q.
What is the socially optimal level of river
preservation?
How much would each individual pay?
Why might river preservation be difficult to
implement?
 Typically, the
pricing system requires
charging a different price to each
consumer. Consumers may not choose to
reveal the strength of their preferences.
Due to non-excludability consumers still
receive the benefits, giving them more
reason to not reveal their preferences.
This diminishes the incentive to
contribute.
Public
Goods
• Typically the market undersupplies public
goods. Why?
• Free-riders –someone who derives benefits from
a commodity without contributing to its supply.
 Group
Quiz Next Thursday
 Writing
Assignment Due Oct. 27th