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.