Question

Public goods consider an economy with two consumers, Ben and joe. there is public good in this economy in a form of tomado series. Ben's demand for the tomado series is given by p=10-Q, and Joe's demand for tomado series is p=8-2Q. The marginal cost for providing tomado series in the markets is constant at MC=9. i) Which two properties must be satisfied for series to qualify to be public good? ii) Is there a problem for free rider problem? iii) Derice Market demand curve for the series iv) How many series will be provided in the market? v) What will be the price of this series?

Answer 1

1) a public good has two properties:

A) non excludable : no one can exclude the Consumption of the public good via charging the prices .

B) non rival : if one person consumes a public good, then his Consumption doesn't reduce the Consumption for the others

2) yes free rider problem, bcoz no one is willing to contribute for the provision of the public good, as everyone feels that the other people will contribute for the provision.

3) market demand curve is the vertical summation of the individual demand curve that is at a given quantity ,summation of the individual willingness to pay.

So market demand curve:

P = 10- Q +8 - 2*Q

P = 18- 3*Q

4) at equilibrium, P = MC of public good

18 - 3*Q = 9

so 9 = 3*Q

so Q* = 3

5) price = 18-3*3 = $ 9