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UT / Economics / ECO 301 / What is the meaning of the free-rider problem?

What is the meaning of the free-rider problem?

What is the meaning of the free-rider problem?

Description

School: University of Texas at Austin
Department: Economics
Course: Introduction to Economics
Professor: Schneider
Term: Summer 2015
Tags: Public_Goods, Common_Goods, and Production_Costs
Cost: 25
Name: Week 11: Public Goods and Common Resources and Firms Production Cost (Typed)
Description: These are these weeks notes. I will also upload a study guide soon for the Midterm.
Uploaded: 11/09/2017
5 Pages 24 Views 2 Unlocks
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Erick Razo Week 11 Professor Dima Shamoun


What is the meaning of the free-rider problem?



Introduction to Economics (ECON 301)

Public Goods and Common Resources

Chapter 11

● The​ ​Free​ ​Rider​ ​Problem-​ ​The​ ​Problem​ ​with​ ​Public​ ​Goods 

○ A free rider is a person who received the benefit from using a good without paying for it ○ Non-excludable and non-rivalrous goods (public goods) create an incentive to free ride ○ If everyone free rides, the public good does not get provided

■ Ex. There are 300 people in the room and we need 180 people to pay for National Defence, but if everyone wants to free ride, so nobody gets National Defence


What is the meaning of the free-rider?



○ Non-Provision

■ The problem with Public Goods is that when there is the ability for people to free ride, everybody is going to want to free ride, increasing the probability that no one will pay for the good or service We also discuss several other topics like How many groups are associated with issue advocacy?

○ Private​ ​Provision​ ​of​ ​Public​ ​Goods

■ The Importance of Property Rights 

● Ex. Trees and Paper

○ If a person advocates for the planting of more trees, they should

advocate for the increase in consumption of paper

■ Although it might seem like an oxymoron, the increase in

demand for paper will cause an incentive for paper

companies to plant more trees in their private property


What is the content of the importance of property rights?



Don't forget about the age old question of What is dna double helix?

■ People take care of their private

● Ex. Extinction of Cows?

○ If one consumes beef and milk, you increase the demand of cows,

which incentivises companies to have more cows

■ This reduces the chance of cows going extinct

Firm's Production Cost

Chapter 12

● Why​ ​Start​ ​a​ ​Business? 

○ Profit

■ Profit is the incentive to provide people with a product

■ Total Profit = Revenue - Total Cost

● Revenue 

○ The price that a product is sold multiplied by the quantity sold

● Total Cost 

○ Implicit cost plus the Explicit cost

■ Accounting Profit vs. Economic Profit 

● Accounting Profit:

Erick Razo Week 11 Professor Dima Shamoun

Introduction to Economics (ECON 301)

○ Accounting Profit = Total Cost - Explicit Cost

● Economics Profit:

○ Economic Profit = Total Revenue - (Explicit Cost + Implicit Cost)

○ It is always less than accounting profit If you want to learn more check out What is a false memory?

○ Implicit Cost

■ It takes into account opportunity cost

■ Not easy to calculate

● Production​ ​Functions​ ​and​ ​Marginal​ ​Products 

○ Production​ ​Functions

■ Describes the relationship between the quantity of inputs you use (labour machines, tech, etc) and the quantity of outputs you produce We also discuss several other topics like What are the four main parts of the declaration of independence?

○ Marginal​ ​Products

■ Describes the increase in output that results from adding another unit of input, holding all other resource constant.

● Diminishing Marginal Product 

○ The marginal of an input decreases as you add more inputs Don't forget about the age old question of How long does each stage of digestion take?

○ Holding things constant

● As each additional garbage worker is hired, there is a

decrease in the marginal

trash collected

If you want to learn more check out What is an aniconic phase?

● ​ ​Production​ ​Cost 

○ Total​ ​Cost

■ Fixed Cost + Variable Cost = Total Cost

● Fixed Cost: 

○ Cost that will not change with output

○ Ex. The cost of the Lecture hall of UT will not increase if we hold

more lectures lectures

● Variable Cost: 

○ Cost will change with input

Erick Razo Week 11 Professor Dima Shamoun

Introduction to Economics (ECON 301)

○ Ex. You will need to increase the number of professors with an

increase in lectures

○ Average​ ​Fixed​ ​Cost

■ Fixed Cost divided by Output

■ Always decreases with increase of quantity

○ Average​ ​Total​ ​Cost

■ Total Cost divided by Output

■ Total cost per output

■ Parabola shaped graph

○ Average​ ​Variable​ ​Cost

■ Variable cost divided by Output

■ Parabola shaped graph

○ Marginal​ ​Cost

■ Change in Total Cost

● How much is an extra unit of Output going to cost me

Erick Razo Week 11 Professor Dima Shamoun

Introduction to Economics (ECON 301)

● The​ ​Firm’s​ ​Different​ ​Cost 

★ Total Fixed Cost is constant

● The​ ​Firm’s​ ​Different​ ​Average​ ​Cost

★ Interception between Marginal cost and Average Total Cost is

always at the vertex of ATC and its called the Efficient Scale 

○ This is the best point to

produce

Erick Razo Week 11 Professor Dima Shamoun

Introduction to Economics (ECON 301)

● Short-Run​ ​Cost​ ​vs.​ ​Long-Run​ ​Cost 

○ Long-run​ ​Cost

■ All cost are variable

■ Even fix cost becomes variable

■ Sunk Cost 

● Cost that one cannot recover

○ Short-Run​ ​Average​ ​Cost​ ​vs.​ ​Long-Run​ ​Average​ ​Cost

★ Diseconomies of Scale:

○ Is the portion where MC is

above ATC

○ Where one is hiring so

many people that one can’t

coordinate

★ LRAC: How many benefits are

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