Question

Question 2: Many large cities have convention centers in their downtowns. (Both St. Paul and Minneapolis have a convention center.) The idea is that organizations will rent out the convention center and bring in a lot of people from around the country (world) to have meetings. Oftentimes city governments help pay to build convention centers. We want to think about this good (convention centers) from the perspective of people (organizations) that consume the good: the organizations that would rent out the center for their conventions.

(a) Thinking about the good/service “a convention center,” is it excludable or non-excludable? Explain.

(b) Thinking about the good/service “a convention center,” is it rival or non-rival? Explain.

(c) Based on your answers in (a) and (b) is the good/service “a convention center” susceptible to a free-rider problem? Clearly explain.

(d) I claim that “convention centers” exhibit an externality. Would it be a positive or negative externality? Explain.

(e) Based on your answers above and using concepts seen in class, why might a city government help pay for a convention center? Clearly explain.

Answer 1

a) A good is said to be excludable, if when one person using it prevents others from using it. Since, the convention center can be used by a lot of people simultaneously, it cannot be considered excludable. It is hence NON EXCLUDABLE.

b) A good is said to be rival, if when one person using it results in reduction of utility when another person tries to consume it. Because of the fact that if the centers get too much crowded it might result in congestion, this convention center can be said to be RIVAL IN CONSUMPTION.

c) Yes. Because a good is susceptible to free rider problems if it is non excludable and rival in consumption i.e. A PUBLIC GOOD.

Because people are not paying for the redevelopment of convention centers and the state government is, people in general will not have the incentive to use it in a proper way to maintain the structure.

d) Because convention centers bring people together and they can share ideas, it can be thought that this results in having a positive externality as social marginal benefit is more than private marginal benefit.

e) A positive externality results in market failure as quantity demanded by market is less than efficient quantity demanded. So, in order to correct this and have a market equilibrium, the government are helping pay for it.