Assignment 10-13 Public goods (1)

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Feb 20, 2024

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ASSIGNMENT: PUBLIC GOODS What does it mean for a commodity to be rival in consumption? What does it mean for a commodity to be non- rival in consumption. A good whose consumption of a unit of the commodity by one person does not preclude consumption of the same unit of the same good by another person is called to be non-rival in consumption. The opposite is true for a good that is rival in consumption. Give an example of an item that is rival in consumption; give an example of something that is non-rival. A rival in consumption good is a bottle of coke, a non -rival good is a lighthouse. What does ii meant for a commodity to be excludable in consumption? What does it mean for a commodity to be non-excludable in consumption? A commodity is called non-excludable if the commodity is available for consumption by one person it is available for consumption by many people, if not everybody. The opposite is true for a good that is excludable. Give an example of an item that is excludable; give an example of something that is non- excludable. An excludable good is a T-shirt, where as non-excludable good is clean air. If an item is non-rival in consumption at one point in time, will it be non-rival always and for ever? Explain. No, for example too many consumers at the same time could make it difficult for additional consumers to be able to consume something, such as a road that was empty but now has a lot of traffic because of increased numbers of cars. If an item is non-excludable in consumption at one point in time, will it be non-excludable always and for ever? Explain 1

No, because there can be ways to stop consumption of certain goods such as free TV which can be encrypted. Give an example of a commodity which is rival but non-excludable. What is such a commodity called? There are call open access goods, and example is a forest or fishery. Give an example of a commodity with is excludable but non-rival What name is given to such goods? Club goods, example being private golf club. What is the definition of a public bad? Give an example. These are items whose consumption is harmful, not beneficial: it reduces the consumer’s utility. Example could be air pollution. In what way could air pollution be seen to fit the definition of a public bad? It is non rival because multiple people can be affected by it at once and it is non excludable. What distinguishes an externality from a public good (bad)? There could be externalities that effect a single person, Does being non-excludable affect the likelihood that for-profit commercial enterprises will choose to supply a commodity? How and why? Yes, if a good is not excludable it will be difficult to collect revenue from production and consumption, so making profits would be difficult. What is meant by the term “free-riding”? The free-rider problem is a type of market failure that occurs when those who benefit from resources, public goods (such as public roads or hospitals), or services of a communal nature do not pay for them or under-pay. 2

Can you give a real-world example of free-riding behavior? This could be people who borrow books from a private member’s library. Does being non-rival affect the likelihood that for-profit commercial enterprises will choose to supply a commodity? How and why? Yes, because if a good is non rival, the marginal cost of supplying an extra consumer is 0, resulting in the price being 0, so there would be 0 revenue. Who is most likely to undertake the supply of public goods? How can they finance this? This could be governments, and this would be financed through taxes. Could a private business ever supply a public good? How would that work out? Would the resulting supply be socially optimal? Yes the could, but there would be an undersupply. Conceptually, how is the economic valuation of a quantum of a public good different from the economic valuation of a quantum of a private good? Can you run into an aggregate economic value for a public good that is an order of magnitude larger than the aggregate economic value of a similar resource if it were a private good? How? Give an example of a resource that could be conceptualized as a private good or as a public good. Explain how the competing conceptualizations might arise? Why might the different conceptualizations matter? 3

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There is a community of 500 people who all eat fish. They have the same preferences, including the same demand function for fish, which is x = 15-2p. What is the aggregate demand for fish? (x is measured in pounds of fish eaten per capita). If there is a fixed supply of 5000 pounds of fish, what is the market price for fish? What is the aggregate consumer’s surplus from eating fish? Are people likely to have an individual demand curve for a particular public good? How does one obtain the public’s aggregate demand curve for a public good? Does this differ from how one obtains the public’s aggregate demand for a private good? Explain. There is a community of 500 people, located by a lake. Nobody in the community eats fish, but they all value the existence of the population of fish in the lake as part of the natural ecosystem. Each member of the community has a latent demand curve for the population of fish as a public good given by p = 25025 – 0.5x, where x is the population of fish in the lake. How much would each member of the population be willing individually to pay to maintain the population at 5,000 fish? What is the community’s aggregate demand curve for the population of fish as a public good? If individuals in a community do have an individual demand curve for a public good, how and where would they express that demand? Suppose you had an estimate of the public’s aggregate demand curve for a public good. How would you determine the socially optimal level of supply of that good? What information would you need? What would be meant by “the socially optimal level of supply” of that public good? 4

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