EEP101_lecture8 - EEP101/ECON125 Lecture8 PublicGoods...

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EEP 101/ECON 125  Lecture 8 Public Goods David Zilberman
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Overview Heterogeneity, non-rivalry, and market failure · Non-excludability and market failure · Optimal provision with homogeneous individuals · Private market outcome for non-excludable public goods · Mechanisms for providing the socially optimal level of public goods · The specification of congestion costs in public goods models
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Public goods: Goods or services that can be consumed by several individuals simultaneously. Non -rivalry: Multiple individuals ca n consu me th e sa me good without diminishing its value . Non -excludabi lity: An individual cannot be preven ted from consu ming the good. Examp les : Fre sh air, a public park , a be autiful view, national de fens e .
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Original Demand - 1 P Q Demand of one individual and the supply Q 1 D = a - bQ MC = c - dQ Q 1 = α-χ β+δ D 1
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Horizontal Demand - 2 P Q Demand of one individual and the supply Q 1 D 2H = a - Q b /2 MC = c - dQ Q 2 H = α-χ .5β + δ D 1 Q 2
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Horizontal Demand - Large N P Q Demand of one individual and the supply Q 1 D INH = a - Q b /N MC = c - dQ Q NH = α-χ 1/ Ν β + δ D H1 D HN D H2 Q 2 Q N
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Vertical Aggregation - 2 P Q Demand of two individuals and the supply Q 1 D 2 = 2a - 2bQ MC = c - dQ Q 1 = 2α- χ 2β + δ D 1 D 2 Q 2
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Vertical Aggregation - 3 P Q Demand of three individuals and the supply Q 1 D 3 = 3a - 3bQ MC = c - dQ Q 1 = 3α- χ 3β + δ D 1 D 2 Q 2 D 3 Q 3
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Vertical vs. Horizontal Aggregation Horizontal demand leads to infinitely elastic demand  at  P  =  a . Vertical leads to infinitely inelastic at  Q  =  a / b . Vertical aggregation is used to find demand for public 
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EEP101_lecture8 - EEP101/ECON125 Lecture8 PublicGoods...

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