Lecture Review on Public Goods and Market Demand
Demand Curves and Market Demand
Individual Demand Curves
Brianna's Demand Curve: P = 8 - Q_B
Carlos' Demand Curve: P = 16 - 2Q_C
Examples of Market Demand at Varying Prices
At Price = $2
Brianna wants to consume 6 slices of pizza
Carlos wants to consume 7 slices of pizza
Total Market Demand = 13 slices
At Price = $4
Brianna wants to consume 4 slices of pizza
Carlos wants to consume 6 slices of pizza
Total Market Demand = 10 slices
At Price = $6
Brianna wants to consume 2 slices of pizza
Carlos wants to consume 5 slices of pizza
Total Market Demand = 7 slices
Summing Up Demand Curves
The market demand is found by summing the individual quantities horizontally at each price.
Market Demand Equations:
For Brianna: Q_B = 8 - P
For Carlos: Q_C = (16 - P)/2
Total Market Demand: Q = Q_B + Q_C = 16 - (3/2)P
Public Goods and Their Demand
Example of a Public Good: Mosquito Traps
Characteristics:
Nonrival: One's enjoyment does not prevent another's enjoyment.
Nonexcludable: Benefits are available to all, regardless of payment.
Individual Willingness to Pay for Mosquito Traps
For Mosquito Traps:
Brianna's Demand: P_B = 8 - Q
Carlos' Demand: P_C = 16 - 2Q
Summing Willingness to Pay (Vertical Summation)
At Quantity of 2 Traps:
Brianna willing to pay $6
Carlos willing to pay $12
Total Willingness to Pay = $18
At Quantity of 4 Traps:
Brianna willing to pay $4
Carlos willing to pay $8
Total Willingness to Pay = $12
At Quantity of 6 Traps:
Brianna willing to pay $2
Carlos willing to pay $4
Total Willingness to Pay = $6
Market Demand for Mosquito Traps
Total Willingness to Pay Equation:
Market Demand = 24 - 3Q
Maximum Joint Willingness to Pay = 24
Quantity of Mosquito Traps at Price = $0 = 8
Free Rider Problem and Government Role
Free Rider Problem:Consumers may hide their true valuation of a public good since they can benefit without payment. This creates an incentive to let others fund the good.
Role of Government:To address free riding, governments can use taxation to ensure adequate provision of public goods, ensuring that goods like national defense are adequately funded.