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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 "willingness to pays".
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...
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- Spring '10