Econ majors, HW help please

[Mo0o]

I'm taking this Econ/PoliSci/Philo course and I actually have zero backgournd in all 3 sections so this class is a bit of an adventure. One of the homework questions asks:

"The marginal cost of adding an additional user to a public good is zero. Therefore the price should be zero." T/F Briefly discuss.

I'm thinking false, in the sense that even though it might not cost any additional resources for one more person to partake in the public good (such as viewing a monument), it doesn't necessarily mean the price should be zero. I'm thinking the price should be set at what the marginal demand is for that one extra person. So an analogy could be a national defense system could protect one extra person within the nation at no cost to its infrastructure but that does not mean the govenrment will not levy taxes against that person.


I'm also not sure how marginal cost factors into a public good since i thought public goods by default are nonrivalrous so that another person partaking in the public good would not diminsh its rewards on others.

 

[drinkmorejava]

I believe it should be true as a public good is non-excludable and non-rivalrous. If everyone can get as much as they want and it does not cost anymore, charging for another user isn't necessary. Not to mention, if you charge it's no a longer public good as by definition, it's not possible to exclude someone, which charging would do.

A public good is not priced at marginal costs. I'm not an expert, but it could be more regarded as sunken cost with an effectively infinite utility.

You seem to already know this, but the public/private goods chart is available here.
http://en.wikipedia.org/wiki/Private_good

 

[TuxDave]

Edit

 

[Mo0o]

is there a difference between a pure public good and a public good that's simply nonrivalrous? WIkipedia says that you can have public good that is price excludable and that the most important aspect of the "public good" is that it's nonrivalrous

And i'm also wondering, since adding a person changes the collective marginal evaluation, would it be possible that his contribution to the marginal evaluation makes it worth while to purchase the next unit of the of the public good. and example would be say it costs 10 cents a person per week for 10 people to upkeep a small statue ($1.00 a week today). One extra person viewing would not cost the original 10 people any more. But lets say the cost to build and maintain, say, a small plaque next to the statue would cost a total of $1.15 a week while the marginal evaluation of the 10 people for the plaque (the next unit in this public good) is merely 11c a person (1 extra cent), thus the plaque is not built. But since theres one more person, the collective marignal evaluation is now 11x11 ,1.21, meaning the plaque could be built for all the enjoy if only we also charged the 11th person

 

[drinkmorejava]

To differentiate the goods you are talking about, you have to realize that all goods are characterized by both rivalry and excludability, you can't have a product with only a rivalry characteristic. That said the difference between a public good and one that is non-rivalrous, is that a non-rivalrous good, depending on the excludability, could either be a Natural Monopoly(excludable) or a Public good(non-excludable).

If you have a price excludable public good, it's not a public good, it's Natural Monopoly. This is something like a cable company where they could effectively add however many users they want (ignoring licensing fees and all the other stuff) without incurring more costs or pushing someone out, yet they charge for it anyway, which is why it is excludable.

As for your example, that's more of a public funding debate, which I would presume is based off of an ATC per user rather than any marginal cost. If you have more people viewing a monument, it make sense to put more money into it, but to make a decision based off of marginal costs seems poor as any marginal cost is going to be significantly less than the cost of producing the first unit or building the statue in the first place.

 

[Mo0o]

Originally posted by: drinkmorejava
To differentiate the goods you are talking about, you have to realize that all goods are characterized by both rivalry and excludability, you can't have a product with only a rivalry characteristic. That said the difference between a public good and one that is non-rivalrous, is that a non-rivalrous good, depending on the excludability, could either be a Natural Monopoly(excludable) or a Public good(non-excludable).

If you have a price excludable public good, it's not a public good, it's Natural Monopoly. This is something like a cable company where they could effectively add however many users they want (ignoring licensing fees and all the other stuff) without incurring more costs or pushing someone out, yet they charge for it anyway, which is why it is excludable.

As for your example, that's more of a public funding debate, which I would presume is based off of an ATC per user rather than any marginal cost. If you have more people viewing a monument, it make sense to put more money into it, but to make a decision based off of marginal costs seems poor as any marginal cost is going to be significantly less than the cost of producing the first unit or building the statue in the first place.

What's ATC? So the marginal cost is zero which means having an additional person using the public good does not cost anything. so if 10 people originally funded a public good, 50 more peopel can partake without being charged anything. But this would create a nonoptimal situation is that correct? and is that called market failure?

and is there two kinds of marginal cost? The marginal cost of having someone else partake in the current pubilc goods and the marginal cost of increasing the public goods. Theoritically, and ideally, if the marginal cost of increasing a unit of public good is X and the individual marginal evaluation of each individual was >X/n where n is the total number of people then people would be willing to pay a little more to enjoy even more public goods. This is discounting teh free rider problem?

please critique anything wrong i've said

 

[darkswordsman17]

Average Total Cost = ATC

 

[mercanucaribe]

What's the marginal cost to society of economists over-analyzing plaques on statues??

 

[Tuktuk]

Exactly what course is this that combines Economics, Philosophy, and Political Science? That is an awful broad set of subjects to learn. What confuses me more is as someone who has taken intro to Microeconomics and intro to Macro, there are a lot of terms here I'm not understanding. I have the feeling they are simply different terms for the same ideas, though, like ATC for example.

 

[Mo0o]

Originally posted by: Tuktuk
Exactly what course is this that combines Economics, Philosophy, and Political Science? That is an awful broad set of subjects to learn. What confuses me more is as someone who has taken intro to Microeconomics and intro to Macro, there are a lot of terms here I'm not understanding. I have the feeling they are simply different terms for the same ideas, though, like ATC for example.

The class is called Prisoner's Dilemma/Distributive Justice.

 

[Tuktuk]

Originally posted by: Mo0o

Originally posted by: Tuktuk
Exactly what course is this that combines Economics, Philosophy, and Political Science? That is an awful broad set of subjects to learn. What confuses me more is as someone who has taken intro to Microeconomics and intro to Macro, there are a lot of terms here I'm not understanding. I have the feeling they are simply different terms for the same ideas, though, like ATC for example.

The class is called Prisoner's Dilemma/Distributive Justice.

Ah ok I just got the idea this was some sort of intro course since you had no background in any of the subjects.

 

[drinkmorejava]

Originally posted by: Mo0o

Originally posted by: drinkmorejava
To differentiate the goods you are talking about, you have to realize that all goods are characterized by both rivalry and excludability, you can't have a product with only a rivalry characteristic. That said the difference between a public good and one that is non-rivalrous, is that a non-rivalrous good, depending on the excludability, could either be a Natural Monopoly(excludable) or a Public good(non-excludable).

If you have a price excludable public good, it's not a public good, it's Natural Monopoly. This is something like a cable company where they could effectively add however many users they want (ignoring licensing fees and all the other stuff) without incurring more costs or pushing someone out, yet they charge for it anyway, which is why it is excludable.

As for your example, that's more of a public funding debate, which I would presume is based off of an ATC per user rather than any marginal cost. If you have more people viewing a monument, it make sense to put more money into it, but to make a decision based off of marginal costs seems poor as any marginal cost is going to be significantly less than the cost of producing the first unit or building the statue in the first place.

What's ATC? So the marginal cost is zero which means having an additional person using the public good does not cost anything. so if 10 people originally funded a public good, 50 more peopel can partake without being charged anything. But this would create a nonoptimal situation is that correct? and is that called market failure?

and is there two kinds of marginal cost? The marginal cost of having someone else partake in the current pubilc goods and the marginal cost of increasing the public goods. Theoritically, and ideally, if the marginal cost of increasing a unit of public good is X and the individual marginal evaluation of each individual was >X/n where n is the total number of people then people would be willing to pay a little more to enjoy even more public goods. This is discounting teh free rider problem?

please critique anything wrong i've said

Yes, it is free rider, however it is an optimal condition because utility is effectively infinite for a fixed cost. People are only gaining from the statue being there, and for each of the funders, it must have been worth at least as much as they paid or they never would have funded it. It would only be a Market Failure if one of the funders decided not to to pay thinking someone else would, but as the statue is there, that is not the case.

I'm not really sure what you're trying to say about the marginal costs. The point of a public good is that there is no marginal cost to provide one more unit of use. There can be a effective buyer surplus where the cost of using the public good is $0 but their benefit gained from it is greater than $0.

 

[Mo0o]

Originally posted by: drinkmorejava

Originally posted by: Mo0o

Originally posted by: drinkmorejava
To differentiate the goods you are talking about, you have to realize that all goods are characterized by both rivalry and excludability, you can't have a product with only a rivalry characteristic. That said the difference between a public good and one that is non-rivalrous, is that a non-rivalrous good, depending on the excludability, could either be a Natural Monopoly(excludable) or a Public good(non-excludable).

If you have a price excludable public good, it's not a public good, it's Natural Monopoly. This is something like a cable company where they could effectively add however many users they want (ignoring licensing fees and all the other stuff) without incurring more costs or pushing someone out, yet they charge for it anyway, which is why it is excludable.

As for your example, that's more of a public funding debate, which I would presume is based off of an ATC per user rather than any marginal cost. If you have more people viewing a monument, it make sense to put more money into it, but to make a decision based off of marginal costs seems poor as any marginal cost is going to be significantly less than the cost of producing the first unit or building the statue in the first place.

What's ATC? So the marginal cost is zero which means having an additional person using the public good does not cost anything. so if 10 people originally funded a public good, 50 more peopel can partake without being charged anything. But this would create a nonoptimal situation is that correct? and is that called market failure?

and is there two kinds of marginal cost? The marginal cost of having someone else partake in the current pubilc goods and the marginal cost of increasing the public goods. Theoritically, and ideally, if the marginal cost of increasing a unit of public good is X and the individual marginal evaluation of each individual was >X/n where n is the total number of people then people would be willing to pay a little more to enjoy even more public goods. This is discounting teh free rider problem?

please critique anything wrong i've said

Yes, it is free rider, however it is an optimal condition because utility is effectively infinite for a fixed cost. People are only gaining from the statue being there, and for each of the funders, it must have been worth at least as much as they paid or they never would have funded it. It would only be a Market Failure if one of the funders decided not to to pay thinking someone else would, but as the statue is there, that is not the case.

I'm not really sure what you're trying to say about the marginal costs. The point of a public good is that there is no marginal cost to provide one more unit of use. There can be a effective buyer surplus where the cost of using the public good is $0 but their benefit gained from it is greater than $0.

what i mean by the other kind of marginal cost is not the use cost but the cost of increasing the public goods. such as boosting national defense through more research (a marginal cost) as oppose to adding another person being protected by national defense (no marginal cost)

so one is increasing the user and one is increasing the used

 

[drinkmorejava]

Originally posted by: Mo0o

what i mean by the other kind of marginal cost is not the use cost but the cost of increasing the public goods. such as boosting national defense through more research (a marginal cost) as oppose to adding another person being protected by national defense (no marginal cost)

so one is increasing the user and one is increasing the used

They're both marginal costs, just used in a different application. There isn't really such thing as a different kind of marginal cost, a marginal cost is a marginal cost. The marginal cost of protecting one more person is zero. The marginal cost of increasing the military's fighting power by 1%, will either be a decreasing or increasing amount depending on economies of scale and diminishing marginal returns on investments in say, military technologies.

 

[Mo0o]

ok i think things are clearing up. mind if i pm you if i have more questions on the hw?