1 st Group Quiz - Monday Sept. 9 th Homework #2 Due Sept. 16 Exam #1 Sept. 16 Chapters 3, 4, 6 Writing Assignment Due Oct. 23rd.

Upcoming in Class 1st Group Quiz - Monday Sept. 9th

Homework #2 Due Sept. 16

Exam #1 Sept. 16• Chapters 3, 4, 6

Writing Assignment Due Oct. 23rd

Homework Problem 1 What is the difference between a

common good, a public good, and an open-access resource? Give examples of each.

ExcludableNon-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

Well-Defined Property Rights

Exclusivity – • All benefits and costs accrued as a result of owning

and using the resources should accrue to the owner, and only the owner, either directly or indirectly by sale to others

Transferability – • All property rights should be transferable from one

owner to another in a voluntary exchange Enforceability –

• Property rights should be secure from involuntary seizure or encroachment by others (ie. eminent domain)

Homework Problem 2 What is willingness to pay (WTP)? What is your WTP for a dozen eggs

from Meijer? What is your WTP for a dozen farm

fresh eggs from organically raised free-range chickens?

Explain why they are different (or the same).

Homework Problem 3 Assume a change in the quality of a

good results in an increase in consumers’ willingness to pay. Assume also that the supply of the good is unchanged. Illustrate this situation graphically and identify the change in net benefits attributable to the change in quality.

Homework Problem 4Price

20 40 60 80 100 120 140 160 180

Qd 200 180 160 140 120 100 80 60 40

Qs 20 60 100 140 180 220 260 300 340

Consider the following supply and demand schedule for steel.

Pollution from steel production is estimated to create an external cost of $60 per ton.

Show the external cost, market equilibrium, and social optimum on a graph

Homework Problem 4 What kinds of policies might help to

achieve the social optimum? How would this policy affect consumers? How would this policy affect producers? What effect would the policy have on market equilibrium price and quantity?

Common Good 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 it’s not in anyone’s best interest.

Salmon Fishing

Number of Boats (in hundreds)

Tota

l P

rod

uct

(in

hu

nd

red

s o

f to

ns

of

fish

)Constant Returns

Diminishing Returns

Absolutely Diminishing Returns

-1

0

1

2

3

4

5

6

7

0 1 2 3 4 5 6 7 8 9 10 11 12 13

Number of Boats (in hundreds)

Do

llar

s (i

n m

illi

on

s)

Total Revenue

Total Costs

Fishery Profits

Figure 4.2: Total Revenue, Total Costs, and Profits for the Entire Fishery

Number of boats(in hundreds)

1 2 3 4 5 6 7 8 9 10 11 12 13

Total fish catch (hundred tons)

10 20 30 40 48 54 58 60 60 58 54 48 40

Total revenue (in million $)

1 2 3 4 4.8 5.4 5.8 6 6 5.8 5.4 4.8 4

Total costs (in million $)

0.4 0.8 1.2 1.6 2 2.4 2.8 3.2 3.6 4 4.4 4.8 5.2

Total profits(in million $)

0.6 1.2 1.8 2.4 2.8 3 3 2.8 2.4 1.8 1 0 -0.8

Table 4.1: Total Fish Catch, Revenue, Costs, and Profit

Number of Boats (in hundreds)

Do

llar

s (i

n t

ho

usa

nd

s)

Average Revenue

Marginal Revenue

Marginal Cost

Open-access Equilibrium

Efficient Outcome

• •License Fee

Figure 4.3: Marginal Revenue and Cost Analysis of Fishery

Number of boats (in hundreds) 1 2 3 4 5 6 7 8 9 10 11 12 13

Revenue per boat(in thousand $) 10 10 10 10 9.6 9 8.2 7.5 6.6 5.8 4.9 4 3.1

Cost per boat (in thousand $) 4 4 4 4 4 4 4 4 4 4 4 4 4

Profit per boat (in thousand $) 6 6 6 6 5.6 5 4.2 3.5 2.6 1.8 0.9 0 -0.9

Table 4.2: Average Revenue, Costs, and Profits

Number of boats (in hundreds)

1 2 3 4 5 6 7 8 9 10 11 12 13

Total revenue (in $ million)

1 2 3 4 4.8 5.4 5.8 6 6 5.8 5.4 4.8 4

Marginal revenue (in $ 000)

10 10 10 8 6 4 2 0 –2 –4 –6 –8

Marginal cost (in $ 000)

4 4 4 4 4 4 4 4 4 4 4 4

Table 4.3: Marginal Revenue and Cost Analysis of Fishery

Upcoming in Class 1st Group Quiz - Monday Sept. 9th

Homework #2 Due Sept. 16

Exam #1 Sept. 16• Chapters 3, 4, 6

Writing Assignment Due Oct. 23rd