Question

In: Economics

Explain clearly using an example how the demand for pure public and private goods is derived?...

Explain clearly using an example how the demand for pure public and private goods is derived? How is the efficient output obtained in each good?

Expert Solution

Private Goods

Market demand for a Pure Private Good is derived by adding quantities demanded at each price.Marginal benefit curve for a private good is obtained from horizontally aggregate of all individual demand curves for the good.

Suppose we’re trying to find aggregate demand for ice cream. Assume 10 consumers in market, each has demand given by q=5-(1/5)P. We get the market demand for icecream by horizontally aggregating demand curves, that is

Q=50-2P

Efficient Output

Each extra unit of ice cream costs $1 to produce, MC=1.

Market demand for ice cream by horizontally aggregating demand curves is Q=50-2P .

Inverse demand curve is P=25-(1/2)Q . It is Equivalent to overall MB curve: MB=25-(1/2)Q.

For efficiency, need to pick Q such that MB=MC.

Suppose, MC=1

MB=25-(1/2)Q

Setting these equal, we get 25-(1/2)Q=1 or Q=48

Public Goods

Market marginal benefit curve for a public good is obtained from vertically aggregate of individual demand curves for the good .Because the good is non rival, so each unit of the good gives benefits to everyone in the population, regardless of how many people use it. Demand schedule represent the vertical summation of the individual marginal utility for each unit.

Suppose there are 10 people in a city, and they all enjoy visiting parks . Each has demand curve for parks given by

q=5-(1/4)p.

Rearranging, this as p=20-4q, we need to vertically aggregate individual MB curves (MB=10-2q) and Get market MB=200-40Q

Efficient Output

Suppose development of each park cost $20 to produce (MC=40)

MB=MC for efficiency, so to find efficient Q,

200-40Q=40

Q=4 The efficient number of parks is 4

Rahul Sunny answered 1 year ago

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