EXAMPLE

a The firm with the highest cost of

reducing pollution via try to buy
that have the
permits from firms
lowest costs of reducing pollution
Firm C will sell 20 units of
pollution permits to Firm B
at a priceof fro cpa 30

Firm A 20 units of PP
Firm B W units t 20 units of PP
Find Ightfromfirm C
A 5120 10 4200 y goo F nm C O units of PP 1

B 30 x 20 600 510 20
20 x to 200 FirmB 0 Firm C
A
 S
optime social cost
P in S private cost
¡ A market is described by the following supply and
demand equations:
To
c wi
socially
if foumpeftfiorlimaty
fIPopt
¡ Qs = a + bP
¡ Qd = c – dP iac y i
ow equilibrium
x
pa.
Here, a, b, c, d > 0, and c > ca Qf of market
free
¡ Suppose that each production of a good in this
market incurs a cost x to society. What is the loss
P E g's
in efficiency by producing at the market-clearing

t
quantity?
a Q 0 Q
¡ Calculate the corrective tax T that can force the
market to produce at the socially-optimal b p
outcome.
D private value

17wlr Yacpa.pt Q Qopt

2
¡ A market is described by the following supply and T
demand equations: indtheuquiudvalue. Q
¡ Qs = a + bP a t bP
Qd = c – dP dP
¡
Q c
Here, a, b, c, d > 0, and c > a.
c dP
¡ Suppose that each production of a good in this at BP
a a
market incurs a cost x to society. What is the loss
p
in efficiency by producing at the market-clearing
quantity?
Ttd
¡ Calculate the corrective tax T that can force the
market to produce at the socially-optimal
Qt a t b I
tbc b
outcome. i aXbtd
td 3

ad the
Q Ltd
 sowal cost
Eb 9g
unne
¡ A market is described by the following supply and
P t x
demand equations:
¡ Qs = a + bP Pa adytdbf.ly t x
¡ Qd = c – dP
Here, a, b, c, d > 0, and c > a.
valve
¡ Suppose that each production of a good in this P Ed Qf c private

market incurs a benefit x to society. What is the

loss in efficiency by producing at the market- P Qf E Csorial cost awe
clearing quantity?

EEE
¡ Calculate the corrective subsidy T that can force
the market to produce at the socially-optimal
Ea Ea E E x

outcome. QC's at
Eatas x

Qopt Etf Gtag 4 x

ECONOMICS 11:
PUBLIC GOODS AND COMMON POOL RESOURCES
TF: EDDY SANTOS
RIVALRY AND EXCLUDABILITY

t fgood

¡ Rivalry – Does one person’s use of the good reduce another person’s ability to use it?
¡ Excludability – Can people be prevented from using the good?

6
 where
Clubgoods goods an
providing unit
additional increase
not the
does
host for
grown'gµc o
I
tragedy of free rider
he common problem

7
WHY MARKETS CAN ONLY SUPPLY PRIVATE GOODS EFFICIENTLY

Public goods

Publiogoods confu positive

externalities
to
society

q
¡ Primarily because of excludability
¡ If a good is non-excludable, self-interested consumers will not pay for it (free-rider problem)
¡ When a good is non-excludable, the production is less than socially optimal (and may in fact be zero)
¡ Typically, when a good suffers from the free-rider problem, the government has to step in and provide the good
itself (usually funded by tax revenues), and potentially make everyone better off

Fine
air v
m
8

public goods themselves

 Q Qop

TRAGEDY OF THE COMMONS

¡ This problem plagues common pool resources.

¡ Again, this happens because of non-excludability.
¡ Here, however, over-utilization of a common pool resource becomes a
problem because they are rival. confering negative externalities
7
¡ Each agent does not have an incentive to reduce consumption because doing
so will likely not reduce the over-utilization of a good
¡ Government can step in to regulate consumption via quotas, or taxes
internaling the neg
externality
9
CONCLUSION

¡ In both cases, ill-defined property rights cause the problems to arise.

¡ Also, in both cases, the government can step in and implement certain policies to solve the problem.

10
a Yes it is both non excludable I non rival
within the dorm room

T wTP
b 17
1 7 151 3 2
2 13 8
totalWTP
3 9 at the thirdfilm
4 6 6 perperson
5 4
C Total cost of renting 3 8
Stevens g 6 12 Christopher 3 46 43
6 6
11

Peter 12
James 6 6 0
d Yes split the cost depending as a person's
w TPI i.e the person with the highest
WTP the most
pays
No incentive to tell the true WTP
is than
Yes Steven's WIP always higher
e
the price
he must contribute for each
film f film u
2 perpersonper
because 12

f Publicgoods are hard to produce

have an incentive to mask their
 g w

a TOTALBEN 50 f f too c 300

450
b 120 per person
3630

Frank 5 Joe will rot against

the
Callie will vote for
fireworks display

13
c 20 t 140 f 160 320

d 360
a 8h0
3

Bess bed will vote for the ref

will vote against
Nancy
14

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haImsanaYysY
I