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Micro: Chapter 17

Midterm 3

TermDefinition
rival one person's consumption of a good directly effects someone else; ex= buying pair of schools, Big Mac
nonrival just because I consume a good doesn't mean you can't; ex= radio station, trees
excludable I can prevent you from consuming a good if you don't pay for it; ex= shoes
nonexcludable you can enjoy goods without paying for it; ex= tree, NPR, national defense
4 categories of goods private goods (rival, excludable); artificially scarce goods (nonrival, excludable); common resources (rival, nonexcludable); public goods (nonrival, nonexcludable)
why nonexcludability causes markets to fail people won't provide goods they cant prevent others from consuming (no money made); freerider problem: let others pay for good and mooch (group project); nonexcludability=inefficiently low production; market bad at producing bc private firms can't benefit
why nonrival causes markets to fail efficiency requires MB=MC; MC of providing a nonrival good is 0; if you consume it, it doesn't prevent you from using it -> marginal cost to next consumer is effectively 0; unless price is 0, demand will be too low = inefficiently low consumption
ways to provide nonrival/nonexcludable public goods? private donations only have limited scope; market solutions like ads on facebook; public pressure only works with small communities; turn to the government
how much should government provide? MC=MB doesn't work w/nonrival; gov should make decisions based on total benefit to society which is the sum of the individuals; MSB >(=)MC
how do you decide what to choose? add up the MB of everyone involved and see if that's greater than or equal to MC of one more unit; if only 1 person was making the choice, wouldn't get optimal quantity; socially optimal level different from 1 person's quantity
public good provision moral marginal social benefit = sum of marginal benefits of all who benefit from good (MSB=MBeveryone); gov should provide another unit if MC is less than or equal to total MSB (don't just ask what 1 person values the good at)
how to get the marginal social benefit and the money to pay for it incentive to overstate how much you value something in a hypothetical situation than if they had to pay; majority voting (median voter decides quantities); tiebout sorting (vote w/feet, but people can't always just move)
common resources rival, nonexcludable (fishing, public water); chronic overuse, consume too much if nothing stops you; indiv uses resource until personal MB=MC, ignore externalities; MSC=MB+MEC (but you don't feel MEC so you ignore it)
how to fix common resources pretty much like externalities; tax the use of the resource; permit/licenses (rights to fish); property rights (once someone owns something, they have incentive to maintain it); ex=hunting rights for rhinos, if they=$, incentive to keep them around
artificially scare goods nonrival, excludable; cable tv, computer software, movies; MC of providing to another indiv is zero, but people can charge non zero price (MC after good 1=0); MC<MB for some transactions, we have surplus; DWL; Qmarket<Qefficient
review of public goods: how much is right? MSB=MSC; everyone benefits from good without taking away from someone else, what matters is sum of all indiv marginal benefits; indiv will choose level that's too low; the fix= gov provided
common resources: how much is right? market will set MC=MB and ignore social cost caused by consumption (grazing lands, clean water, atmosphere); fix= taxes, property rights; THINK EXTERNALITIES
artificially scarce goods: how much is right? social efficiency requires MB+MC, but MC of artifically scare good is 0; not free to have exist, but once it exists, MC is 0 (cost to produce is sunk, so you ignore those costs and make money back by charging for good); fix= regulation (?)
Created by: nicook
 

 



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