Week 6 term 1 Flashcards
(41 cards)
What are the properties of private goods?
Rivalry and exclusion.
rivalry = if only one person can consume the good
exclusion = other can be prevented from consuming the good
Define a public good.
A good that exhibits non-rivalry and non-excludability.
- non-rivalry - if everyone can consume the good ( consumption of an additional unit of the good involves zero social marginal costs of production
- non-excludability - it is impossible to exclude individuals from consuming the good
What does non-rival mean?
Everyone can consume the good; consumption by one does not prevent consumption by others.
What is non-excludability?
It is impossible to exclude individuals from consuming the good.
What arises from the non-rivalry of public goods?
The presence of a positive externality, because consumption of the goof by one individual ameks consumption by others possible
What is the matrix of categoris of goods?
private goods, public goods, open-access common property, club good
How do we derive the market demand for private goods?
Add the demand curves horizontally.
=> at each price level we add the demand curves
How do we derive the market demand for public goods?
Add the demand curves vertically. => at each price level we add the demand curves vertically to get the market demand
What is the efficiency for private good based on marginal cost?
Occurs where MC = D.
Efficiency implies private marginal beneficts are equal MC
What is the efficiency for public good based on marginal cost?
D1 + D2 = MC
Efficiency implies the sum of private marginal benefits is equal to MC.
What is the aggregate resource constraint for individuals A and B?
xA + xB + G = ωA + ωB. where G = GA + GB
What is a socially efficient allocation?
One that maximizes social welfare subject to the aggregate resource constraint.
What is the Samuelson Rule?
The sum of the marginal willingness to pay for public goods must equal the marginal cost of providing an additional unit.
- In case of public goods, the MRS in consumption must reflect the amount of the private good that all consumers would be willing to give up for an additional unit of the public good, since everyone will obtain the benefits of the extra unit of the public good.
- an individual’s willingness to pay for an extra unit of the public good
- efficieny condition states that the sum of the marginal willingness to pay must equal the marginal cost of providing an extra unit of the public good
What happens if individual A believes individual B will contribute nothing?
A’s best response is to contribute xA(0) such that their marginal willingness to pay equals the marginal cost of production.
As B increases their contribution, what does A do?
A’s best response would be to contribute xA(xB) < xA(0).
What is the Nash Equilibrium in the context of public goods?
The Nash Equilibrium contributions occur when the best response functions intersect.
What condition must be met for individuals to contribute to public goods?
Each individual contributes until his own willingness to pay is equal to the marginal cost of producing the public good.
What does MRS A + MRS B > MRT imply?
It implies that too little of the public good is provided compared to the socially efficient solution.
What is free riding?
Free riding occurs when individuals have an incentive to contribute too little to the provision of a public good.
In the roommate T.V. scenario, what is the cost of the T.V.?
£100
What are the payoffs to A and B from the T.V.?
Payoff to A = £80, Payoff to B = £65
What is the unique Nash Equilibrium in Scenario 1 of the T.V. purchase?
(Don’t buy, Don’t buy) is the unique Nash Equilibrium.
In Scenario 2, what are the contributions of A and B towards the T.V.?
A contributes £60 and B contributes £40.
What are the payoffs to A and B when both contribute towards the T.V.?
Payoff to A = £20, Payoff to B = £25.
