Economic Analysis of Public Goods and Common Resources - Prof. Jose J. Vazquez, Study notes of Microeconomics

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Week 14

Cong / Shirley

Classification of goods

• Characteristics of Goods

-- Excludable: Suppliers of the good can prevent people who don’t pay from consuming it

-- Rival in consumption: The same unit of the good cannot be consumed by more than one people at the same time

• Public Goods

--How much should be provided?

--At the level when Marginal Social

Benefit=Marginal Social Cost

--Marginal Social Benefit=The sum of each

individual’s marginal benefit

--So no individual has incentive to pay for

providing the efficient level of a public good

• Common Resources

-- Overuse Problem

--An individual will continue to use the good

until his individual marginal benefit = individual

marginal cost

--So It’s possible that individual’s marginal cost <

marginal social cost

• So market can only supply private goods or service efficiently

--Nonexcludable goods suffer from the free-

rider problem

--Nonrival goods suffer from inefficiently low

consumption

Q1. Traffic congestion causes higher costs and discomfort to residents of a city, and

a. the marginal social cost of any one individual's use of the

roads is less than the individual marginal cost.

b. the marginal social cost of any one individual's use of the

roads is greater than the individual marginal cost.

c. the marginal social cost of any one individual's use of the

roads equals the individual marginal cost.

d. it is impossible to compare the marginal social cost of any one

individual's use of the roads with the individual marginal cost.

Q3. Which of the following goods is most likely a common resource?

a. the Internet

b. a public park

c. a pair of pants

d. the fire department

Q4. For a good to be efficiently provided by a market economy, which of the following characteristics is essential?

a. It is rival in consumption

b. It is excludable.

c. It is a common resource.

d. It is rival in consumption and it is excludable.