Econ 200: Lecture 9
April 28, 2016
0. Learning Catalytics Session: 65477700
1.  Types of Goods
2.  Exam Review
Refer to the figure below. The social cost of dry
cleaning is higher than the private cost because of air
pollution produced by the process. What is the
deadweight loss of the externality?
S2 = MC social
P, $ per
item
S1 = MC private
$7.50
$7.25
$7.15
D
6
7.5
D, hundreds of
thousands of items/
week
2
Refer to the figure below. The social cost of dry
cleaning is higher than the private cost because of air
pollution produced by the process. What is the
deadweight loss?
S2 = MC social
P, $ per
item
S1 = MC private
$7.60
$7.50
$7.25
DWL=0.5($0.35)(150,000)=
$26250
$7.15
D
6
7.5
D, hundreds of
thousands of items/
week
3
Attributes of Goods and Services
We have seen that markets are better at providing the efficient level
of some goods and services than others.
This is related to some important attributes of the goods and services:
whether their consumption is rival and/or excludable.
Rivalry: The situation that occurs when one person’s consuming a
unit of a good means no one else can consume it.
Excludability: The situation in which anyone who does not pay for a
good cannot consume it.
4
The Four Categories of Goods
5
Efficient Provision of the Categories of Goods
Markets tend to be good at providing efficient levels of private goods.
Why?
•  The person making decisions about how much to purchase tends
to be the only one benefiting from the good, so only their
preferences matter.
6
Efficient Provision of the Categories of Goods
Markets are not so good at providing efficient levels of the other types
of goods. Why?
•  People can free-ride on public goods, enjoying the benefits from
them without paying for them.
•  People have little incentive to conserve common resources,
leading them to be over-consumed (tragedy of the commons).
•  Profit-maximization tends to lead too many people to be excluded
from quasi-public goods.
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Constructing Market Demand Curves—Public Goods
For a public good – add the prices
each consumer is willing to pay.
Top: Jill is willing to pay $8 per hour
for a security guard to provide 10
hours of protection.
Middle: Joe is willing to pay $10 for
that level of protection.
Bottom: P= $18/hour & Q=10 hours
will be a point on the demand curve
for security guard services.
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Efficient Production of a Public Good
But finding this market
demand curve can be difficult;
consumers may not have
incentives to reveal their
willingness to pay for public
goods.
Cost-benefit analysis can be
useful to determine the correct
levels of public goods.
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Efficient Consumption of a Public Resource
Common resources tend to be over-consumed. Why?
•  While people cannot be excluded from the resource, their
consumption is rival, depleting the resource for other people.
This can be thought of as a negative externality.
Ideally, we would make people pay for their consumption, as with
Pigovian taxes.
àWhen this is not possible, the situation is referred to as the
Tragedy of the commons, with the common resource being
overused.
10
Common Resources: Efficient Level of Consumption
The efficient level of use,
QEfficient, is determined by
the intersection of the
demand curve and S2.
But each individual tree-cutter ignores the external cost, resulting
in QActual wood being cut. As the quantity is not optimal, there is
deadweight loss as a result.
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A Way Out of the Tragedy of the Commons
The source of the tragedy of the commons is the same as the source
of negative externalities: lack of clearly defined and enforced property
rights.
When enforcing property rights is not feasible, though, two types of
solutions to the tragedy of the commons are possible:
1.  If the geographic area involved is limited and the number of
people involved is small, access to the commons can be
restricted through community norms and laws.
2.  If the geographic area or the number of people involved is large,
legal restrictions through taxes, quotas, and tradable permits on
access to the commons are required.
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Can you give an example of the tragedy of the commons?
13
Can you give an example of the tragedy of the commons?
My answers:
-  Groundwater in Las Vegas, Nevada
-  Traffic on I-5
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Assume that the
market for sriracha
sauce can be
represented by the
following supply and
demand equations:
P, $ per
s
P=Q /10
bottle
P=10-QD/10
The production of each
bottle of sriracha
sauce creates an
external cost of $3 so
that the Marginal
Social Cost of sriracha
production is given by
P=3 + Qs/10
S2 = MC social
S1 = MC private
D
D, bottles
per day
Find the Deadweight
Loss in this market
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S2 = MC social
Assume that the
P, $ per
market for sriracha
item
S1 = MC private
sauce can be
$8
represented by the
$3 (amount of negative
$6.50
following supply and
externality)
$5
demand equations:
P=Qs/10
P=10-QD/10
The production of each
D
bottle of sriracha
sauce creates an
35 50
D, hundreds o
external cost of $3 so
thousands of
that the Marginal
week
Social Cost of sriracha
Qe=35 (Solve 3 + Qs/10 = 10-QD/10)
production is given by
Qm = 50 (Solve Qs/10 = 10-QD/10)
P=3 + Qs/10
Find the Deadweight
Loss in this market
Pm=$5
DWL = $22.50
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Midterm Exam Guidelines
• 
• 
• 
• 
No graphing calculators or iphones
No hats
No bathroom breaks except in emergencies
No papers of any kind – leave them at home or put
them in a bag under your desk
•  No talking, even after your exam is turned in
•  Please arrive and be seated at least 5 minutes early
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Midterm Exam Guidelines
•  Exam covers chapter 1-6 (No Ch 9 / Trade)
•  Please answer questions clearly, neatly, and show all
work
•  E.g. DWL= ½ (1000-900)($4-$2) = $100
•  NOT DWL=$100!!!!
•  Answers will be graded for correctness and
understanding of concepts
•  Monday Office Hours 2:30-4 (savery 339)
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Midterm Exam Extra Problems
•  In myeconlab: Go to Chapter Resources (left side nav
bar) for additional problems, chapter homework, and
quizzes
•  All back of the book questions are here as well as a
10 question quiz for each section of the book.
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Outline of Topics
(Note: Exclusion from this list does not mean exclusion from the
test)
Ch 1:
How to graph/slope of the line
Calculating percent change
What does marginal mean?
Ch 2:
Comparative advantage and opportunity cost
Specialization and gains from trade
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Outline of Topics
Ch 3:
Demand curves/law of demand
Shift in demand
Supply curves/law of supply
Market equilibrium
Shift in supply
Changes in equilibrium
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Outline of Topics
Ch 6:
Elasticity of demand & midpoint theorem
Inelastic vs elastic demand (technical definition and
intuitive meaning)
Demand elasticity and revenue
Elasticity of supply & definitions
Ch 4:
Surplus and efficiency (CS and PS)
Price floors and price ceilings – how do they work?
Graphs, examples, welfare effects (DWL)
Taxes - ditto
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Outline of Topics
Ch 5:
More comparative advantage and calculating gains from
trade
Trade restrictions – Graphs, restrictions, welfare effects
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