Week 6 Flashcards
Define a non-rivalrous good.
A good that when consumed by one person, can be provided at zero cost to every other person.
Give an example of a non-rivalrous good.
Public TV stations. A sunset. National defense. When consumed by one person, provided at zero cost to every other person.
Define a non-excludable good.
A good that, if consumed by one person is automatically available to others. Often leads to overcrowding and free-riding.
Give an example of a non-excludable good.
A light house. A pretty building. Public TV. A sunset. National Defense.
Define a market failure
When the private markets fail to efficiently supply society.
Define a public good.
A public good, once produced and consumed by one person, does not diminish the ability of others to consume it as well. They can be non-rivalrous, non-excludable, or both.
When should society purchase a good?
When the marginal societal value (MSV) is greater than the marginal cost.
What is the efficiency quantity of a good?
Summation of all marginal values of a good is equal to the marginal cost of the good. This is typically vertical summation.
If non-payers cannot be excluded from consuming a public good…
…private markets are going to do badly. It will be an overall inefficient outcome.
For public good, use private markets when…
1) You can price discriminate - charge people their marginal value for the product.
2) You have the ability to exclude non-payers.
What are four ways to determine someone’s marginal value for a public good?
1) Use prices of similar private goods.
2) Use an entrepreneurial solutions - buy all houses, install street lights, sell all houses at market value.
3) If the number of beneficiaries is small, they will achieve the outcome themselves.
4) Use a mechanism that forces people to review their true preferences, such as the Clarke mechanism.
How do I go about applying the Clarke Mechanism?
1) Assign a cost to each individual that they would have to pay - an even burden.
2) Have everyone state net valuation. Don’t assume this is true.
3) If the sum is positive, continue. Else, stop.
4) Find all pivotal individuals, where if they didn’t exist the outcome would change.
5) Each pivotal person is required to pay the tax of the cost of total harm to the overall group.
6) All players will have an incentive to truthfully review their willingness to pay.
What has to be true for the Clarke Mechanism to work?
1) The tax can’t go back into the system.
2) People can’t build coalitions.
3) Net value has to be small relative to income.
