ECO 2030 1st Edition Lecture 27 Outline of Last Lecture I The 4 types of goods Outline of Current Lecture II III IV V Cost benefit Analysis Value of a human life Tragedy of the commons The role of government Current Lecture Cost benefit analysis If a sorority wants to do a fundraiser by hosting a firework show they determine the cast of the show would be 10 000 They determine through surveys that 20 000 people value the show at at least 10 Therefor the benefits 200 000 and the costs to 10 000 Therefor the idea is good However since firework shows are nonexcludable and nonrival in consumption meaning you get the free rider problem people will not pay to see the fireworks because they will be able to see them from anywhere Public Goods Cost benefit analysis will be on exam and quiz Governments need to decide which public goods to provide and which ones not to provide use cost benefit analysis This is done by comparing the costs vs the benefits to society without price signals to observe this is difficult findings are rough approximations e g A new traffic light the cost 10 000 the benefit is more safety Say the risk of fatal accidents decreases from 1 6 to 1 1 5 benefit They only way this is possible to calculate is if you place a value on a human life The Value of human life Courts award damages in wrongful deaths suits by total amount of money a person would have earned in his life older people get less than younger people This ignores other opportunity costs of losing your life Another way to value a human life is by assessing how much compensation people need to take certain risks Typically a human life is worth 10 million These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute Cost benefit analysis for the traffic light Expected benefits 005 x 10 million 50 000 Since cost 10 00 Benefit 50 000 Governments will approve the traffic light Tragedy of the commons Common resources are not excludable are rival in consumption This creates a race to use the resource leads to depletion Common resources are used more than socially desirable tragedy of the commons creates a negative externality one persons uses of a common resource diminishes other peoples ability to enjoy it Government can solve the problem through regulation or taxes to reduce consumption However governments usually try to turn the good into a private good this is done by granting property rights this changes the incentives instead of racing to deplete the resource they now have an incentive to manage their resources even if they still share the resource with a few other companies there is an incentive to manage the resource together The resource is still rival in consumption but now it is excludable Other important common resources are clean air and clean water The negative externality is pollution Governments can use regulations or corrective taxes Congested roads the negative externality is congestion Corrective tax such as tolls or higher gas taxes to reduce congestion Fish whales and other wildlife common resources Oceans are the least regulated common resource Because they are expansive and need international cooperation Regulations are difficult to enforce regulations such as fishing hunting permits limits on fishing hunting permits limits on size and quantity of animals harvested Animals are endangered when when they have commercial value but are public goods eg buffalo and elephants Governments can make it illegal to kill the animals but it is hard to enforce laws If governments can privatize the animals can say you can kill them on your own land there is an incentive to manage the animals in order not to deplete them The cow is not endangered because is is easily privatized When the good is private ranchers have more incentive to manage resource The importance of property rights When a market fails to allocate resources efficiently it is because property rights are not well established meaning something of value does not have an owner with the legal right to control it Government can solve to problem by establishing better property rights which unleashed market forces Can regulate private behavior And use the tax revenue to provide the good if the market fails