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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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# 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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 Fall '09
 HAMILTON

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