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Unformatted text preview: 1 Public Goods 2 Economics 401 A u B u Nash Equilibrium Relative prices of the public good and the private good are fixed to one in equilibrium The budget sets adjust through contributions to public good by others not through prices! O G O A O B x A B The Inefficiency of Equilibrium In equilibrium there is an inefficiently low provision of public goods Sufferers of pollution will not buy enough permits The externality: Agent i does not take into account that Agent j benefits from his purchase of the public good A A is preferred by both Agents B u A u O G O A O B 2 A u O G O A O B Contract Curve The Contract Curve As before the contract curve is the locus of points where the indifference curves are tangential Describes Pareto optimal allocations B u B u A u B u A u A Missing Markets Problem? Instead of a single public good G (clean air), define separate private goods G A and G B clean air for agent 1 and clean air for agent 2 Here is the bit of imaginative thinking required:...
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This note was uploaded on 04/02/2008 for the course ECON 401 taught by Professor Kuhn during the Fall '08 term at University of Michigan.
- Fall '08
- Public Good