1. (PM, PA, PB) per firework 2. (PM, PB, PA) is a point 3. (horizontal, vertical

Question

1. (PM, PA, PB) per firework

2. (PM, PB, PA) is a point

3. (horizontal, vertical) summation

VALERIE: Hi, Shen, before I begin my homework assignment on public goods and common resources, I would like to ask you a few questions. I am confused about the distinction between the terms "excludability" and "rivalry." When is a good or service "excludable" or "non-excludable" and when is a product "rival" or "non-rival?" SHEN: Valerie, I agree this is a confusing matter. Essentially, if it is easy to prevent someone who is unwilling to pay for a product to be excluded from receiving it, then a product is excludable. But if it is either costly or impossible to exclude a person from using a service or a good, then a good or service is non-excludable. On the other hand, if one person consumes the good or service and this precludes someone else from being able to consume the same good or service, then a good or service is rival If a product can be consumed by one person and still remain available for consumption in the same amount by another person as well, then it's non-rival. VALERIE: But why is it important to make these distinctions? SHEN: Making these distinctions enables us to classify goods or services as being either private goods, public goods, common resources, or club goods. And this classification can be insightful in determining the socially optimal amount of these goods and services to produce. Public goods are non-rival and non-excludable in consumption. An example would be national defense. It is non-rival because your sense of national security provided from this government service does not impact the amount of national security I am able to enjoy. Moreover, it is non-excludable because national defense is made available to everyone-no one can be excluded from the sense of national security that national defense provides. VALERIE: I have another question. How do we estimate the demand for public goods and services? In other words, how do we estimate the amount people are willing to pay for public goods and services?

Explanation / Answer

1. Their combined willingness to pay is PM per firework

2. PM is a point on the market demand curve as it is the sum of each consumer's willingness to pay

3. Market demand is found by the horizontal summation of individual demand curves.

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