Lecture 14

Lecture 14 - 10/27/10 Chapter 11: Externalities and...

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10/27/10 1 Lecture 14 The Economics of Information Chapter 11: Externalities and Property Rights G. The tragedy of the commons 1. Outcome when pasture is privately owned 2. Outcome when pasture is publicly shared Now suppose that nobody owns the land (= commons), and anybody who wants to can graze cows on it Suppose there are already 3 cows and your neighbor considers adding 1 more. Your neighbor’s private marginal cost = $600 Your neighbor’s private marginal benefit = $700 Yes, he will add 1 more. # of cows weight per cow after 1 year 1 1000 lbs. 2 900 lbs. 3 800 lbs. 4 700 lbs. 5 600 lbs. 6 500 lbs. So now there are 4 cows. Another neighbor considers adding 1 more. This neighbor’s private marginal cost = $600 Your neighbor’s private marginal benefit = $600 Yes, he will add 1 more. # of cows weight per cow after 1 year 1 1000 lbs. 2 900 lbs. 3 800 lbs. 4 700 lbs. 5 600 lbs. 6 500 lbs. Conclusion: if not privately owned, people will graze more cows
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10/27/10 2 # of cows weight/ cow Total pounds dQ dTC MC= dTC/ dQ 1 1000 1000 1000 600 60¢/lb. 2 900 1800 800 600 75¢/lb. 3 800 2400 600 600 $1.00/lb. 4 700 2800 400 600 $1.33/lb. 5 600 3000 200 600 $3.00/lb. 6 500 3000 0 600 If not privately owned, people would graze 5 cows, even though social MC = $3.00/lb. and only sells for $1.00/lb. Reason: part of social MC is that other cows are less well fed, and I don’t personally pay for that cost. Each neighbor only considers his own private MC. (cost of cow) Chapter 12: Economics of Information A. Probabilities Suppose we flip a coin 10 times Count 3 heads, 7 tails fraction of heads = 0.30 Try a second time, flip a coin 10 times, this time Count 6 heads, 4 tails fraction of heads = 0.60 And again, a third trial: fraction of heads = 0.50 Suppose we try 100 coin flips and count the fraction of heads: • Trial 1 = 0.48 • Trial 2 = 0.54 • Trial 3 = 0.56 Fraction of heads as a function of the number of coin flips number of observations 10 100 1,000 10,000 100,000 Trial 1 0.3000
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Lecture 14 - 10/27/10 Chapter 11: Externalities and...

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