Econ 201 1st Edition Lecture 29Outline of Last Lecture 1.Dick and Jane exampleOutline of Current Lecture 1. Excludability and RivalnessCurrent LectureA 2 x 2 Taxonomy of Goods/Resources• Excludability ~ Can access to the good/resource be prevented?• Rivalness ~ Does access by one user reduce the amount available?– Goods that are not excludable generate little or no revenue.– Goods that are not rival should be priced at zero for efficiency.– Some kind of Collective Action is required for full efficiency.• Government is often used to pursue Collective Action.Excludability and Rivalness ~ Illustrations• What is not Excludable?– Broadcast radio and television programs– Lighthouses– Security through crime deterrence– Ocean fisheries– Atmosphere of the earthThese 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.• What is not Rival?– Broadcast radio and television programs– Lighthouses– Security through crime deterrence– Cable television– Art museumsExcludability and Rivalness ~ Grey Areas• Excludability can often be established at some cost, which depends on state of technology of exclusion.– Examples of satellite broadcast radio and barbed wire.– Toll booths are required to make bridges & highways excludable.– Why not do the same for street systems?– Excludability of central London streets is based on advanced technology.• Degree of rivalness may depend on degree of congestion.– Wi-Fi network at low use level is non-rival, but slows with more users.– A crowded art museum is partly rival.– Bridges and street systems are non-rival with few users, but increased traffic means another user interferes with others.Special Problems of Public Goods ~ Provision and Pricing• Lack of Excludability leads to the Free Rider Problem.– Charging payment for use requires possibility to exclude.• Public Goods are costly to produce, but generate little revenue.– Private supply will emerge only if revenue can cover cost.• If Benefit > Cost, it is efficient to provide, but not profitable.– Some amount may be provided, but not the socially optimal level.• Collective Action is required ~ the Role of Government.• Pricing– Providing access to another user has zero cost.– For full efficiency, P = 0 even if exclusion were possible.– Consider toll policy for a bridge that is not congested.– If toll > 0, some net benefits may not be captured. Benefit ~ Cost Analysis• Not all public goods should be produced. • Government provision should pass a Benefit ~ Cost test.• Community must evaluate Benefits and Costs to make rational Collective Action decisions.• Markets perform Benefit ~ Cost analysis for private goods.– If Benefits < Costs, businesses will not provide the goods.– Collective guidance is usually not required for efficiency.– Qualification if negative externalities arise:• Market allocation may result in production where Benefit < Cost.• Typically this condition is relevant at the margin. i.e. Production has gonetoo far, but should not be reduced to
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