1 st Group Quiz - Monday Sept. 10 th Homework #2 Due Sept. 17 Exam #1 Sept. 17 Chapters 1, 3, 4, 6. Writing Assignment Due Oct. 24th

Excludable Non-Excludable Non-Rivalrous Rivalrous Club Goods Public Goods Common Goods Private Goods Fish, hunting game, grazing land National defense, lighthouses, clean air, information goods Food, clothing, toys, cars Satellite television, Golf courses, Cinemas

Non-excludable and non-rivalrous (indivisble) Charming landscapes Biological diversity Number of Species Species interdependence Provides new sources of food, energy, industrial chemicals, raw materials, and medicines Genetic Diversity critical to species survival Useful for cross-breeding to develop superior strains Environmental quality Healthy habitat for animals, clean air, clean water, clean soil

Marginal cost = marginal benefits. Typically the market undersupplies public goods. Free-riders –someone who derives benefits from a commodity without contributing to its supply.

Graphically non-rivalry means that if each of several individuals has a demand curve for a public good, then the individual demand curves are summed vertically to get the aggregate demand curve for the public good.

Suppose there are two people in a community who benefit from river preservation and the biodiversity created by it. Indvidual A has a WTP for river preservation of P=10-2q Individual B has a WTP for river preservation of P=8-2q q is defined as miles of river preservation Suppose the marginal cost of river preservation is MC=2q.

How much would be produced if individual A were to pay for the river preservation? Would individual B, then pay also for any river preservation?

What is the socially optimal level of river preservation? How much would each individual pay? Why might river preservation be difficult to implement? What are the communitys total benefits from river preservation?

The Illinois Power Authority is considering updating its transmission substations to use smart-grid technology, which improves reliability and efficiency in the electric grid. Each time a new smart-grid meter is installed Chicago, Naperville, and Rockford customers all benefit from increased reliability of their electricity. A study was done to determine the benefit to each city as follows: Chicago – Marginal Benefit=10-0.5Q Naperville – Marginal Benefit=5-0.5Q Rockford – Marginal Benefit=10-1Q What is the total marginal benefit when five smart-grid meters are installed?

Rivalrous and non-excludable Tragedy of the Commons When a resource is non-excludable, individuals act independently and rationally consume with their own self-interest in mind. Ultimately, this will deplete the resource, even when its not in anyones best interest.