1 / 26

Eep101/econ 125 lecture 9 Public Goods

Eep101/econ 125 lecture 9 Public Goods. David Zilberman. Overview. Original demand-1. Demand of one individual And the supply. P. D=a-bQ MC=c-dQ. D1. Q. Q1. Horizontal demand -2. Demand of one individual And the supply. P. D2H=a-Qb/2 MC=c-dQ. D1. Q2. Q1. Q.

meira
Download Presentation

Eep101/econ 125 lecture 9 Public Goods

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Eep101/econ 125 lecture 9Public Goods David Zilberman

  2. Overview

  3. Original demand-1 Demand of one individual And the supply P D=a-bQ MC=c-dQ D1 Q Q1

  4. Horizontal demand -2 Demand of one individual And the supply P D2H=a-Qb/2 MC=c-dQ D1 Q2 Q1 Q

  5. Horizontal demand -large N Demand of one individual And the supply P DINH=a-Qb/N MC=c-dQ DHN DH1 DH2 QN Q2 Q1 Q

  6. Vertical aggregation-2 Demand of two individuals And the supply P D2 D1 D2=2a-2bQ MC=c-dQ Q Q1 Q2

  7. Vertical aggregation-3 Demand of three individuals And the supply D3 P D2 D1 D3=3a-3bQ MC=c-dQ Q Q1 Q2 Q3

  8. Vertical vs horizontal aggregation • Horizontal demand lead to infinitely elastic demand at P=a. Vertical leads to infinitely in-ealstic at Q=a/b • Vertical aggregation is used to find demand for public goods • As the population increases the demand becomes more inelastic. • The demand becomes Dn=na-nb • The equilibrium quantity is • When there are infinite individuals the quantity demanded is equal to b/a and the demand is inelastic

  9. Provision of public goods • Free riding- most people will wait that others will pay for the public and then they will free ride • One justification for government intervention is provision of public goods • Bigger communities will have larger public good provision The cost to community with n people v1s1Qno The cost to community with2n people v2s2Q2no D2n Dn v2 s2 s1 v1 o Qn Q2n

  10. Provision mechanism • Public provision by taxes • Donations, fund raising( nature conservancy) • Volunteer activity( duck unlimited,Siera club) • Tax deduction-for contribution to public good generating organizations • Advertisement and naming (TV,concert hall) • Special institutions- • The church • Army • Art patron (giving back to the community)

  11. Non rivalry with excludability • If access to a good with non rivalry is possible it can be provided privately • First by a monopoly- the entry fee aoc will capture all the surplus but outcome is efficient Dn MC a D1 c Qn o

  12. Alternative mechanism -gov’t provision fee cover costs • Fee in the area OMQn/N • Consumer surplus SMO S Dn MC M a D1 c Qn O

  13. A third mechanism-concessionaire earns competitive profit • Fee in the area RMQnO/N • Consumer surplus SMR • Producers surplus RMO S Dn MC R M a D1 c Qn O

  14. Simulation a good with non rivalry and excludability

  15. Heterogeneity of preferences A and C optimal outcomes when only buyers that like the product more intensively are purchasing tickets. The price of ticket under monopoly are AOQcC and AOQGG MC1 A Dmore C MC2 Dless G O Qc QG

  16. Heterogeneity of preferences G and B optimal outcomes In case of public good if marginal cost are high the benefits of the less interested group are important for determining the optimal outcome (Point G) Dtotal MC1 A Dmore B C MC2 Dless G O Qc Qb

  17. Heterogeneity of preferences In case of excludability Monopoly will provide optimal outcome at G but will charge AGLO as entry fee so that half the population will be excluded IN case of MC1 the monopoly will offer Qc Dtotal MC1 A Dmore B C MC2 Dless G O Qc Qb L

  18. Example Two equal sized groups • Dmore =20-X • Dless -10-X • Joint demand P =30-2X for X<10 =20-X for 20>X>10

  19. Case 1:MC=.5X • What is Optimal X* • Try 30-2X=.5X (point A) • X=12 is not feasible • Try 20-X (point B) • =.5X socially • optimal X=20/1.5=13.33 • Fee by monopoly • 26.66*13.33/2=311 B A

  20. Case 2 :MC=2X • To find optimal X solve 30-2X=2X • Optimal X=7.5 • Benfits for people who like the product • (20+20-7.5)*7.5/2=121.75 • People who like less • 12.5*7.5/2=46.675 • Monopoly ignores second group. solves 20-X=X • Optimal policy monopoly for the rich X=6.666 • Fee $111 • Alternative 1 regulated concessionaire providing 7.5 units for 46.675-income 93.35 Cost 56.25 • Alternative 2 pay equals to cost divided by buyers

  21. Excludability with heterogeneity • Differentiated provision- people pay different fees for different products • Exclusive vs public beach • Hunting licenses • Different housing accommodations in national parks • Allow to raise fund and pay and address equity considerations

  22. public good when part of the public does not care • 2 groups-one does not care for • D1=10-X • D2=0 MC=X • Should government provide public good? • In this case the groups that like the product may provide it through collective action-clubs • Optimal X=5 • Costs 25/2= 12.5/N will be paid by users

  23. Clubs:Optimal size • Benefits depend on amenity size X and number of users N B(N,X) • Cost increases with X • Optimality problem • Optimal decision rules NMB=MC Marginal benefits of size = Marginal cost of congestion

  24. Case 2 MC=2X 30-2X=2X Optimal X=7.5 Benfits for people who like the product (20+20-7.5)*7.5/2=178.125 Peole who like less 12.5*7.5/2=46.675 Optimal policy monopoly for the rich X=6.666 Case 3 Dmore 30-X MC=4X Optimal policy in X=8 Monopoly price to more 52*8/2=208 Monopoly price to less 12*8/2=48 In this case the monopoly will solve 30-X=4X X=6 and charge 54*6/2=162 Which means under provision Of public good

More Related