Question

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. Describe two different benefits of using the rivalness ratio instead of using the SMC of a good to measure the rivalness of that good.

B. 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?

Answer 1

A. 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.

b. 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