LECTURE 2 Flashcards
PURE PUBLIC GOOD =
perfectly NON-RIVAL and NON-EXCLUDABLE
NON-RIVAL =
one individuals’ consumption doesn’t affect another’s opportunity to consume.
Non-excludable =
cannot deny others the opportunity to consume.
Impure public goods =
Satisfy the 2 conditions to some extent but not fully.
Private goods =
rivalrous and excludable.
Impure public good example: non-excludable but rival.
Common property resource - rival if very crowded.
Impure public good example: excludable but non-rival.
Club good - can be made excludable.
MRSx,y =
MUx/MUy = number of units of Y willing to give up for an additional X holding utility constant.
Optimality condition for CONSUMPTION of PRIVATE goods
MRS1 = MRS2 = … = Px/Py
Optimality condition for PRODUCTION of PRIVATE goods
P = MC
Equilibrium for private goods + interp
MRS1 = MRS2 = … = MC
How do we find SMB from individual demand curves ro PRIVATE good?
Horizontal summation of individual demand curves at each price.
SMC for private good is given by…
industry supply curve.
SAMUELSON RULE FOR PUBLIC GOOD
SUM of MRS across individuals = MC of producing the public good.
How do we find SMB from individual demand curves ro PUBLIC good?
VERTICAL summation of individual demand curves at each quantity.
What is each individuals consumption of the public good?
G - the total amount of the public good produced can be consumed by everyone since its non-rival and non-excludable.
What’s F(X, G) = 0 means?
The aggregate production relationship - expressing PPF.
In an optimisation, an allocation means…
A level of G and a distribution of private consumption across individuals.
An allocation is PE if there is NO other allocation such that…(2)
- Satisfies aggregate resource constraint.
2. Makes every individual no worse off and some individuals strictly better off.
How can the government find the PE allocation i.e. find Samuelson rule?
Max SWF s.t. aggregate resource constraint.
Whats the BC for government public good optimisation?
PxX1 + PxX2 + pgG = e1 + e2 for 2 individuals.
Marginal rate of transformation =
Fg/Fi
Why is the MB of an extra unit of the public good the sum of MRS?
Because public good is nontrivial and non-excludable so the additional unit can be consumed by everyone so we sum MB across all individuals.
Whats G* when provided by a private firm? Why?
G > 0 is suboptimal as no consumer WTP since non-excludable. Avoid a loss by G = 0. Free rider problem –> underprovision of public good.
How do contributions to public good and consumption of public good relate in voluntary contributions model?
Contributions may NOT equal consumption - consumption depends on how much society produces as a whole. i.e. consumption = G = g1 + g2.