Lecture 2

Follow Paul samuelson

In this class … we shall cover the following topics
Scarcity
Efficiency
Production possibility Frontier
Opportunity costs
Public and Private goods
Factors of production
Scarcity

A situation of scarcity is one in which goods are limited relative to desires.

Opportunity costs
The value of the next best choice
this can be time energy or even money
The second best alternative forgone after making a choice.
Example –
Government has a piece of vacant land to be used either to build a hospital a school or a sports center
( scarcity )
because the land is enough for only one project then choice must be made from the alternative available
choice
the government decided to build a hospital so the school must be forgone / sacrificed ( opportunity cost )
Public goods and private goods
Public Goods ---
Public goods are goods that are commonly available to all people within a society or community
and that possess two specific qualities: they are non-excludable and non-rivalrous. Everyone has
access to use them, and their use does not deplete their availability for future use.
Example – Street Light, Clean Air
Therefore a Public Good……
A PURE PUBLIC GOOD has two features:

1) Nonrival – once provided, another person

can consume it at no additional cost
2) Nonexcludable (nonexclusive) – once
provided, it is impossible or highly
expensive to prevent anyone from
consuming it
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Pure Public Good Examples
National Defense is a good example of a pure
public good:

1) Nonrival – all people benefit

2) Nonexcludable – it’s impossible to prevent a
single person from benefitting

Other examples: Conventional Radio, A

Beautiful View, street lamp, a good road
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What is a Private Good?
A PRIVATE GOOD has two features:
1) Rival – once consumed, another person
cannot consume it
2) Excludable (exclusive) – others can be
prevented from consuming it

Food (ie: pizza or sushi) is a good example of a

private good. Once I eat it, it’s gone.
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Therefore….
Private goods ---
Private goods are those whose ownership is restricted to the group or individual that
purchased the good for their own consumption. A private good is not shared with anybody
else, but can be sold along with transferring rights to use or consume it.
Pure Public Good Issues
6 Issues arise out of Pure Public Goods:
1) Different Values
2) Public Goods Aren’t Absolute
3) NONRIVAL ≠ NONEXCLUDABLE
4) Unconventional Public Good
5) Private Provision
6) Private Production

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1 ) W H I L E E V E R Y O N E C O N S U M E S T H E S A M E A M O U N T, P E O P L E M AY
VA L U E I T D I F F E R E N T LY

-National defense protects everyone equally.

Paranoid people love it and peace activists
hate it.

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2) PUBLIC GOODS ARE NOT ABSOLUTE
-technology and the market can affect a public good.
A free TV station becomes private if you need a
decoder. A beautiful view becomes rival if there is
a crowd. A good road becomes exclusive if you
put a high toll on it.
-An IMPURE PUBLIC GOOD is to some extent rival
or to some extent excludable. Ex – the good road?!
-most public goods are impure, but analysis of pure
public goods still gives valuable results for impure
public goods
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3) NONRIVAL ≠ NONEXCLUDABLE
-National parks are excludable if they have gates,
but practically nonrival as they are so big
-My office hours are nonexcludable, as everyone
is welcome, but rival if too many people are
waiting in line

-Therefore many public goods are impure public

goods
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4) VARIOUS THINGS HAVE SIMILARITIES WITH PUBLIC
GOODS
-Inspiration can be nonrival and nonexcludable
(such as coming from a sunset, or a
motivational speech by ME !!)
-Fear is nonrival, as one person being afraid
doesn’t prevent others. Fear is also
nonexcludable, as its hard to prevent.
-Income distribution or honesty are public goods
as everyone benefits.
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5) THE PUBLIC SECTOR CAN PROVIDE PRIVATE GOODS

-Medical services, housing, licenses, and utilities

can all be provided by the government and/or
private sector
-The label public or private doesn’t indicate
what sector provides the item

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6) PUBLIC PROVISION ≠> PUBLIC PRODUCTION
-Some public services are contracted out to
private contractors
- -it provides the public service through private
contractors

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Free rider problem
The free rider problem is an issue in economics. It is The free rider problem can crop up when the resource
considered an example of a market failure. That is, it is is shared by all and free to all. Like air. If a community
an inefficient distribution of goods or services that sets voluntary pollution standards that encourage all
occurs when some individuals are allowed to consume residents to cut back on carbon-based fuels, many will
more than their fair share of the shared resource or pay respond positively. But some will refuse to make any
less than their fair share of the costs. change in their habits. If enough follow the standards,
the air quality will improve and all the residents will
Free riding prevents the production and consumption
benefit equally, even the free riders.
of goods and services through conventional free-
market methods. To the free rider, there is little
incentive to contribute to a collective resource since
they can enjoy its benefits even if they don't. As a
consequence, the producer of the resource cannot be
sufficiently compensated. The shared resource must be
subsidized in some other way, or it will not be created.
Factor of production

Land
Labor
Capital
Entrepreneur
Efficiency

Efficiency denotes the most effective use of a society’s resources in satisfying peoples wants and
needs.
Economic efficiency requires that an economy produce the highest combination of quantity and
quality of goods and services given its technology and scarce resources.
An economy is producing efficiently when no individuals economic welfare can be
improved unless someone else’s is made worse of.
Efficiency means that the economy is ON the PPF rather than inside the PPF .
Pareto Efficiency / Pareto optimality
Pareto efficiency, or Pareto optimality, is an economic state where resources cannot be
reallocated to make one individual better off without making at least one individual worse off.
Pareto efficiency implies that resources are allocated in the most economically efficient manner,
but does not imply equality or fairness.

Pareto efficiency, named after the Italian economist and political scientist Vilfredo Pareto (1848-
1923)
Pure Pareto efficiency exists only in theory, though the economy can move toward Pareto
efficiency
A Pareto improvement occurs when a change in allocation harms no one and helps at least one
person, given an initial allocation of goods for a set of persons. The theory suggests that Pareto
improvements will keep enhancing value to an economy until it achieves a Pareto equilibrium,
where no more Pareto improvements can be made. Conversely, when an economy is at Pareto
efficiency, any change to the allocation of resources will make at least one individual worse off.