Question

1. For any good that could potentially be provided by a private firm, the degree of rivalness can be measured by the rivalness ratio SMC/AC. a.[5] How must SMC be defined in order for this rivalness ratio to be able to measure the rivalness of goods that are purely private and also goods that are shareable and nearly purely public? Explain. b.[7] Describe two different benefits of using the rivalness ratio instead of using the SMC of a good to measure the rivalness of that good. c.[5] What is the most likely reason that during a typical three year period the private marginal cost of electricity production fueled by burning coal averages about half of the average cost? d.[12] Use information from the N4 notes, from class and from part c to give your best estimate of the rivalness ratio of each of the following goods. Justify your estimate and explain why it uses the definition of SMC you gave in part a: (d1) an iPhone X during the year that started on February 20, 2017 (about half a year before commercial production of the iPhone X started) and ended on Feb. 20, 2018; (d2) an ebook during a one year period starting 2 months before it can first be downloaded; (d3) electricity produced by burning coal in the US during a 3 year period.

Answer 1

solution-
(b)The ratio is a better estimate of rivalness than SMC Because the ratio SMC/ AC gives the amount by which social marginal cost is higher than the private cost. It is possible to misinterpret a larger absolute value of SMC but a lesser rivalness ratio as compared to private cost.

(c) Average cost could comprise of social and private cost and hence when electricity is produced using burning coal, besides the private cost of the process there would be some cost possibly the cost of environment damage would also be incorporated in the average cost