Econ 100.

2 Microeconomics

Discussion Class
October 11, 2018
UP School of Economics

Glacer Vasquez
glacervasquez@gmail.com

10/11/18 Econ 100.2 Discussion Class   1

  
 
 
Ques&ons  
 

10/11/18 Econ 100.2 Discussion Class   2

Reminders

Ø  Exercise  Set  No.  4  will  be  released  tonight.  

Ø  The  second  exam  is  scheduled  on  Tuesday,  October  16,  2018,  
11AM-­‐1PM  

 
 
10/11/18 Econ 100.2 Discussion Class   3
Recap

Ø  Externality  
Ø  Nega&ve  Externality  
Ø  Posi&ve  Externality  
Ø  Public  Policies  
Ø  Correc&ve  Tax  vs  Regula&on  
Ø  Regula&on  vs  Tradable  Pollu&on  Permits  
Ø  Correc&ve  Tax  vs  Tradable  Pollu&on  Permits  
Ø  Private  Solu&ons  

10/11/18 Econ 100.2 Discussion Class   4

Recap

10/11/18 Econ 100.2 Discussion Class   5

 public goods

10/11/18 Econ 100.2 Discussion Class   6

Outline

Ø  Introduc&on  
Ø  Different  Kinds  of  Goods  
Ø  Public  Goods  
Ø  Common  Resources  
Ø  Tragedy  of  the  Commons  
Ø  Summary  
 

10/11/18 Econ 100.2 Discussion Class   7

Introduction

•  Public  goods  are  goods  that  are  neither  rival  nor  excludable  in  
consump&on.  
•  What  are  examples  of  public  goods?  

10/11/18 Econ 100.2 Discussion Class   8

Different Kinds of Goods

•  A  good  is  excludable  if  a  person  can  be  prevented  from  using  it.  
•  A  good  is  rival  in  consump&on  if  one  person’s  use  of  it  diminishes  
others’  use.      
 
Rival Non-rival

Club goods
Private goods
(natural
Excludable (e.g food, slot
monopoly)
in UP)
(e.g. cable TV)
Common Public goods
resources (e.g. national
Non-excludable
(e.g. fish in the defense, street
ocean) lights)

10/11/18 Econ 100.2 Discussion Class   9

Different Kinds of Goods

Ø  A  road  is  which  of  the  four  kinds  of  goods?  
•  Rival  in  consump&on?  Excludable?  
•  Rival  in  consump&on?    Only  if  congested.  
•  Excludable?    Only  if  a  toll  road.  
 
Ø  Four  possibili&es:  
•  Uncongested  non-­‐toll  road:    public  good  
•  Uncongested  toll  road:    natural  monopoly  
•  Congested  non-­‐toll  road:    common  resource  
•  Congested  toll  road:    private  good  

10/11/18 Econ 100.2 Discussion Class   10

Public Goods

•  Recall:  Public  goods  are  goods  that  are  neither  rival  nor  
excludable  in  consump&on.  
Ø  What  do  you  think  is  the  problem  associated  with  providing  
public  goods  privately?  
•  Public  goods  are  difficult  for  private  markets  to  provide  because  
of  the  free-­‐rider  problem.  
•  Free  rider:    a  person  who  receives  the  benefit  of  a  good  but  
avoids  paying  for  it  
Ø  Why  are  there  free-­‐riders?  
•  If  a  good  is  not  excludable,  then  people  have  incen&ve  to  be  free  
riders,  because  firms  cannot  prevent  non-­‐payers  from  consuming  
the  good.    
•  Result:  The  good  is  not  produced,  even  if  buyers  collec&vely  
value  the  good  higher  than  the  cost  of  providing  it.    
10/11/18 Econ 100.2 Discussion Class   11
Public Goods

Ø  Suppose  that  the  benefit  of  a  public  good  exceeds  the  cost  of  
providing  it,  should  the  good  be  provided?  Who  should  provide  
the  good?  
•  If  the  benefit  of  a  public  good  exceeds  the  cost  of  providing  it,  
then  government  should  provide  the  good  and  pay  for  it  with  a  
tax  on  people  who  benefit.  
Ø  Is  it  easy  to  measure  the  benefit?  
•  Problem:  Measuring  the  benefit  is  usually  difficult.    
•  Cost-­‐benefit  analyses  are  imprecise,  so  the  efficient  provision  of  
public  goods  is  more  difficult  than  that  of  private  goods.      

10/11/18 Econ 100.2 Discussion Class   12

Public Goods

Thinking  Time  
Ø  Why  is  it  difficult  for  private  industry  to  provide  public  goods?  
•  Because  public  goods  are  not  excludable,  the  free-­‐rider  problem  
makes  it  unprofitable  for  private  industry  to  produce  public  
goods.  
Ø  How  is  a  streetlight  (a  public  good)  related  to  a  posi&ve  
externality?    
•  When  people  consider  buying  a  streetlight,  they  fail  to  consider  
the  external  benefit  it  would  provide  to  others  and  only  consider  
their  personal  benefit.    
•  Thus,  there  is  an  underproduc&on  and  consump&on  of  both  
public  goods  and  goods  that  generate  posi&ve  externali&es.  

10/11/18 Econ 100.2 Discussion Class   13

Common Resources

•  Common  resources  are  goods  that  are  not  excludable  but  rival  in  
consump&on.  
•  Non  excludability:  Role  for  government  -­‐  seeing  that  they  are  
provided  
•  Rival:  Role  for  government  -­‐  ensuring  they  are  not  overused  

10/11/18 Econ 100.2 Discussion Class   14

  
 
 
Ques&ons  
 

10/11/18 Econ 100.2 Discussion Class   15

 Tragedy of the Commons

Source: One Minute Economics https://www.youtube.com/watch?v=jSuETYEgY68

10/11/18 Econ 100.2 Discussion Class   16
 Tragedy of the Commons

Source: One Minute Economics https://www.youtube.com/watch?v=jSuETYEgY68

10/11/18 Econ 100.2 Discussion Class   17
 Tragedy of the Commons

Source: One Minute Economics https://www.youtube.com/watch?v=jSuETYEgY68

10/11/18 Econ 100.2 Discussion Class   18
 Tragedy of the Commons

Source: One Minute Economics https://www.youtube.com/watch?v=jSuETYEgY68

10/11/18 Econ 100.2 Discussion Class   19
 Tragedy of the Commons

Source: One Minute Economics https://www.youtube.com/watch?v=jSuETYEgY68

10/11/18 Econ 100.2 Discussion Class   20
 Tragedy of the Commons

Source: One Minute Economics https://www.youtube.com/watch?v=jSuETYEgY68

10/11/18 Econ 100.2 Discussion Class   21
 Tragedy of the Commons

Source: One Minute Economics https://www.youtube.com/watch?v=jSuETYEgY68

10/11/18 Econ 100.2 Discussion Class   22
 Tragedy of the Commons

Source: One Minute Economics https://www.youtube.com/watch?v=jSuETYEgY68

10/11/18 Econ 100.2 Discussion Class   23
 Tragedy of the Commons

Source: One Minute Economics https://www.youtube.com/watch?v=jSuETYEgY68

10/11/18 Econ 100.2 Discussion Class   24
 Tragedy of the Commons

Source: One Minute Economics https://www.youtube.com/watch?v=jSuETYEgY68

10/11/18 Econ 100.2 Discussion Class   25
Tragedy of the Commons

•  The  villager  who  adds  the  extra  cow  takes  no  account  of  the  cost  
inflicted  upon  the  rest  of  the  village.  
•  The  tragedy  is  due  to  an  externality.  
•  Allowing  one’s  flock  to  graze  on  the  common  land  reduces  its  
quality  for  other  families.  
•  People  neglect  this  external  cost,  resul&ng  in  overuse  of  the  land.    
Ø  What  could  the  villagers  have  done  to  prevent  the  tragedy?    

10/11/18 Econ 100.2 Discussion Class   26

Tragedy of the Commons

•  The  villager  who  adds  the  extra  cow  takes  no  account  of  the  cost  
inflicted  upon  the  rest  of  the  village.  
•  The  tragedy  is  due  to  an  externality.  
•  Allowing  one’s  cow  to  graze  on  the  common  land  reduces  its  
quality  for  other  families.  
•  People  neglect  this  external  cost,  resul&ng  in  overuse  of  the  land.    
Ø  What  could  the  villagers  have  done  to  prevent  the  tragedy?    

10/11/18 Econ 100.2 Discussion Class   27

Tragedy of the Commons

Thinking  Time  
Ø  How  are  fish  in  the  ocean  (a  common  resource)  related  to  a  
nega&ve  externality?  
•  A  common  resource  is  free  so  it  is  overconsumed.  Each  consumer  
of  fish  fails  to  take  into  account  the  nega&ve  impact  on  others  of  
their  consump&on  causing  overuse  of  the  resource  from  a  social  
perspec&ve.  
Ø  Why  did  buffalo  almost  become  ex&nct  while  cows  (a  similar  
animal)  are  unlikely  to  ever  become  ex&nct?    
•  Buffalo  were  a  common  resource  and  over-­‐consumed.  Cows  are  
private  goods  and  are  produced  and  sold  at  the  socially  efficient  
price  and  quan&ty.  

10/11/18 Econ 100.2 Discussion Class   28

Summary

•  Public  goods  tend  to  be  underprovided,  while  common  resources  

tend  to  be  overconsumed.  
•  These  problems  arise  because  property  rights  are  not  well-­‐
established.  

10/11/18 Econ 100.2 Discussion Class   29

  
 
 
Ques&ons  
 

10/11/18 Econ 100.2 Discussion Class   30

Outline

Ø  Introduc&on  
Ø  Different  Kinds  of  Goods  
Ø  Public  Goods  
Ø  Common  Resources  
Ø  Tragedy  of  the  Commons  
Ø  Summary  
 

10/11/18 Econ 100.2 Discussion Class   31

Where are we now?
C. Markets and Welfare

1. Market Efficiency
2. Taxation and Efficiency

Mankiw, Chapters 7-9

Samuelson and Nordhaus, Chapter 17
Harford, Chapter 3
Landsburg, Chapter 8

D. Market Failures and Economics of the Public Sector

1. Externalities
2. Public goods

Mankiw, Chapters 10-11

Samuelson and Nordhaus, Chapter 11, 16-17
Levitt and Dubner [2009], Chapter 5
Lansburg, Chapter 9
Miller, et.al, Chapter 25 and 27

SECOND EXAMINATION
10/11/18 Econ 100.2 Discussion Class   32
What’s next?

Next:  Second  Examina0on  

•  Date:  October  16,  2018  
•  Time:  11:00AM  –  1:00PM  
•  Venue:  SE  Audi  
 
 

10/11/18 Econ 100.2 Discussion Class   33

  
 
 
Thank  you  
 

10/11/18 Econ 100.2 Discussion Class   34

References
•  Mankiw, NG. Principles of Economics
•  Cronovich, R. Powerpoint slides for Principles of Economics

10/11/18 Econ 100.2 Discussion Class   35