ECO 2030 1st Edition Lecture 27Outline of Last Lecture I. The 4 types of goodsOutline of Current Lecture II. Cost-benefit AnalysisIII. Value of a human lifeIV. Tragedy of the commonsV. The role of governmentCurrent LectureCost-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 atleast $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 lifeCourts - 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 lifeAnother 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 millionThese 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 = $50,000Since 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 diminishesother 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 enforcelaws\■ 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 tocontrol 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