Coursenotes_ECON301

Allocate public goods we need a process for dealing

This preview shows page 1. Sign up to view the full content.

This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: consumes the same amount of good X. As a result, the difference is the price each person is willing to pay for the good. Given the common amount of X A pays the price PXA B pays the price PXB A and B pay the price PXA + PXB The market demand for a public good X is the vertical summation of all the individual &quot;willingness to pays&quot;. Price PRIVATE GOODS If good Y is a private good, then everybody pays the same price for good Y. As a result, the difference is the amount of good Y each person is willing to buy. Given the common price PY A buys the amount YA B buys the amount YB A and B buy the amount YA + YB The market demand for private good Y is the horizontal summation of all individual demands. Price PX + PX A B PX PX B A PY Public Good X X Y A Private Good Y Y B Y +Y A B Once both the market demand and supply curves for the public good X have been determined, we can solve for the market equilibrium by equating demand and supply. In this final step, there is no difference between a market for a public good and a market for a private good. Once both the market demand and supply curves for the private good Y have been determined, we can solve for the market equilibrium by equating demand and supply. In this final step, there is no difference between a market for a public good and a market for a private good. 245 Price Price S S PX PY D Public Good X X Y D Private Good Y EXAMPLE Again, consider the square root economy (example used from a previous lecture) with unit aggregate endowments allocated between two consumers A and B as follows: Consumer A Consumer B Total Capital (K) KA = 0.2 KB = 0.8 KT = 1 Labour (L) LA = 0.6 LB = 0.4 LT = 1 Let's look at the example side-by-side for the usual case of private goods and the case of public goods (using Lindahl pricing): PRIVATE 222 Solving the cost minimization problem faced by the producer of each good we have the following factor demands on a per unit of output basis: kX = kY = (w / r)1/2 lX = lY = (r / w)1/2 using the zero profit condition of perf...
View Full Document

Ask a homework question - tutors are online