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7 - Today Complete public goods lecture Tragedy of the...

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Today: - Complete public goods lecture. - Tragedy of the commons - Hardin - Numerical example

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Demonstrating the Tragedy of the Commons Imagine a village that has 7 families surrounding a common area where Alpacas can be raised at no cost. Each villager has \$1,000 and must choose whether to invest it in the local bank at an interest rate of 8% per year or buy a one year-old Alpaca which costs \$1000. The price of a two-year-old Alpaca depends upon its weight. Yearly weight gain in turn depends upon the number of Alpacas that graze on the commons. The following provides the market price of two-year-old Alpacas as a function of the total number of Alpacas. Number of Alpacas Price per Alpaca (\$) Total Revenue from Alpacas 1 1200 1200 2 1200 2400 3 1175 3525 4 1150 4600 5 1125 5625 6 1100 6600 7 1075 7525 Mankiw #3 Key is to compare following entry criteria and associated outcomes: 1) Marginal private benefits (here average revenue) = marginal private costs. 2) Marginal social benefits (here marginal revenue to group) = marginal private costs.
Demonstrating the Tragedy of the Commons

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