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Econ435 Notes - Econ435 Notes Preference Misrepresentation...

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Econ435 Notes May 17, 2006 Preference Misrepresentation Credible Preference Misrepresentation - Acting as if your true preferences are something other than what they really are. (Faking it). This leads to a reduction in utility. Result- Individuals whose behavior does not affect market prices “should” always behave truthfully. Demand Revelation- acting in accord with one’s true preferences. NOT engaging in credible preference misrepresentation. Individuals whose behavior DOES affect market prices has an incentive to misrepresent their preferences. II. PUBLIC/COMMUNAL GOODS Public Good - A good that is both non-rival and non-exclusive in consumption. (Review sheet #2, question 1) Non-Rival - if the consumption of that good by one person does not diminish the ability of others to consume that same good. Rival Good - if the consumption of that good by one person diminishes the ability (of others to consume that same good. (Clothing, food, etc.) (Review sheet #2, question 2) Examples of Public Goods- - 1. Lighthouse 2. National Defense 3. Broadcast Signals 4. Internet 5. Highways 6. Performances/Lectures Non-Exclusive Good - if it is impossible (or it is prohibitively costly) to confine the benefits of the good once it is provided to selected individuals. (Once the good is produced, you can’t determine who gets to consume it, and who doesn’t). (Review Sheet #2 question 3) *Many goods that are non-rival are also non exclusive. *But technology can make some non-exclusive goods, exclusive. (Cable television, toll roads). (Review sheet #2, question 4). Free Rider Problem - avoiding making voluntary contributions towards the provision of a public good. (Review sheet #2, question 5). EXAMPLE 1 (Review Sheet #2, question 6)—Suppose that a community of 100 households living in a flood plain considers building a dam (Public good). Suppose that the dam provides benefits of $1000 per household.
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The dam costs $60,000 to build. If each household pays $600 to build the dam, then all households will be better off. (Since they receive $1000 benefit for $600). WILL THE DAM BE FUNDED VIA VOLUNTARY CONTRIBUTIONS?
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