L24 - Public Goods - Definition L24 Public Goods Some goods...

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1 L24 Public Goods Public Goods -- Definition ± Some goods are: Nonexcludable (NE): all consumers can consume the good. Nonrival (NR): each consumer can consume all of the good. ± A good is purely public if NE and NR NR R NE E Examples of public goods ± National defense ± Mathematical formula (Research) ± Nice melody ± Broadcast radio and TV programs ± Reduction in air pollution ± National parks Park Size: Market Outcome ± Two agents: A and B ± Two goods: Park and Burgers ± Park is a public good ± A: Burger lover ± B: Park lover 1 x 2 x 11 1 A B x xx = + 12 2 1 1 (, ) 2 l n ( ) A AA A B Uxx x x x =+ + 2 1 1 4 l n ( ) B BB A B +
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2 A: best response to 10 , 1 $ 2 1 = = = m p p 21 1 () 2ln( ) AA A B Ux x x =+ + 1 1 B x = A: best response to 10 , 1 $ 2 1 = = = m p p 1 () ) A B x x + 1 B x B: best response to 12 $1, 10 B pp m == = 1 () 4ln( ) B BA B x x + 1 A x Equilibrium ± Nash Equilibrium: - best response to - best response to ** 11 , AB x x * 1 A x * 1 B x * 1 A x * 1 B x
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3 Free riding by A ± In Nash Equilibrium: B: Creates a park of size 4
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This note was uploaded on 06/04/2011 for the course ECON 301 taught by Professor Hansen during the Spring '08 term at Wisconsin.

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L24 - Public Goods - Definition L24 Public Goods Some goods...

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