EEP100 - Lecture 14

Let's get started. This is the last lecture before the midterm. Anyone? Hello? Hi.
Unfortunately the audio picks up you guys, so I have to yell, otherwise you have to
shut up, so sorry. If you have a question though, I will listen.
Sorry about the rain; I did not plan on that. I was trying to get a drought so my job
security would be good, but unfortunately we have winter arriving.
Midterm. Let me talk about the midterm. It's probably on the top of some of your
minds. We have made the midterm up. The format is as follows. There will beÉyou
have the entire class period. 120 minutes. Start on time, end on time. There will be
10 true/false questions and 5 long answer questions. Long answer questions will
resemble questions that you see on the homeworks, or they will notÉbut they will
be more familiar than the true/false. True/False: you will not get full credit if you
just say true and write nothing. So it's true/false and explain. The reason that I'm
trying telling you thisÉall of you right nowÉis I want you have the expectation of
coming in, looking at a question, deciding if it's true or false, and giving a really
short, sweet explanation of why it's true or false, okay? And I will not be here, but
Fei and Diana will be here. Hopefully the midterm will be clear enough that you will
not have any problems understanding the questions. You'll have a great time doing
the midterm. At the end of class, we'll hand back your
homework assignments (homework 2). The key is posted, yes? Yes. And your grades
are posted. Crackerjack work by the GSIs. Diana's not here, but I don't know if
you saw the review thing they put up for you. I was amazed. That's great. Really, really
good job. So take advantage of this hard work they're doing for you guys. All
of that stuff is posted on Bspace. My office hours today: 12:30 (right after class) and
at 4:00 because I have to goÉI'm sorry you guys all decided on 4:30, but I didn't know
I had to go to something at 5 o'clock. Obviously I survived the surgery so that's
good news/bad news. And we will have the entire rest of the semester to go.
The blogposts have been going up. They are really good. And I strongly
encourageÉeverytime I put them up now, I warn the students whose posts are going
up, "Hey, your posts are going up." There have been some very, very good responses
from readers on the blog. I encourage the authors of the blogpost to get
involved into that dialogue if you feel like it. I encourage you to get involved with
other peoples' dialogues. I know you don't have 52 hours a day to work on writing
blogposts and opinions and comments, but do take advantage of that ongoing discussion.
If you have written a blogpost, be prepared to revise that blogpost as a class
assignment later in the semester. And be prepared to take into account the comments
that have been put up by other people including, "Your economic analysis sucks."
Okay? If someone said that, and you're going to hand in a briefing (this is probably
going to be briefing #2) and it's a cut and paste, you're probably going to be getting
a zero on that assignment. So now is the time to start paying attention to feedback
on your blogposts. But on the other hand, it's a pretty good start. I'm very excited.
And congratulations to everybody for putting in the effort.
They will keep going up till roughly mid-November. It's like there's so many people
that I've got to put them up a couple a day. Any questions? Open questions?
Do we need a blue book for the midterm? No. Do not bring a blue book. You will be
provided writing space, that'll be it. It'll be single sided if you want more space. Try
and limit yourself. Don't write long essays. It doesn't help anybody. It's easier
to stop at this point. Do you need a calculator?
No, you don't need a calculator. Should be fairly basic. If there's calculus, it'll be
basic calculus. Graphic calculators are prohibited. It's the same thing as everything.
All your crap on the floor, don't look at your neighborsÉyou know just like the
typical midterm stuff. Any other questions? Nobel Prizes. I sent you guys an e-mail about
Lynn Ostrom and Ollie Williamson (as I don't call him). He's up at the economics
department. It was a very, very big deal for people as far as natural resources are
concerned. Lynn OstromÉI'll be talking later about property rightÉLynn Ostrom has
been talking about propertyÉthe first woman to win a Nobel Prize, and I don't know
if that matters because she's so good (but whateverÉshe's a womanÉ).
An economist? An economist, yeah. There's all these scientists
and stuff like that. The political economy of the Nobel Prize is interesting.
I don't know how many of you saw that Barack Obama won the peace prizeÉthat was
a bit of a shocker. And the science prizes are forÉso first of all there's a
science prize, which are physics and chemistry, for enduring contributions. The physics prize
was a guy whoÉone guy did fiberoptics (kind of important). The other
guy did the CCD, which is whatÉI think the thing you use to take photos? Really amazing
stuff, but that was like literally 40 years ago. Obama won the prize forÉyou knowÉhope.
Where we're going is the wrong directionÑworld destruction, so I kind of agree
with that, but it was a bit strangeÉbut on the economics front, Oliver Williamson is
the guru of transaction cost economics. Remember I was talking about theory of the
firm? It was kind of like I was predicting the Nobel Prize by bringing it up in this
class. And he's like this Chesire cat. He kind of just sits there and smiles all the
time, you know? And apparently no one can read his
papers. I've never read his papers, but he's a really cool guy. And Lynn Ostrom
has workedÉshe's a political scientist. So she actually did her dissertation work
at UCLA on groundwater management, so it's really strange because I've known about
her for a long time because my dissertation is about water in Southern California.
But her work is really important because she talks about how communities solve
problems. And she's kind of outside the economic framework,
which would predict that we would have a tragedy of the commons example.
You guys remember the fishing game? Lynn Ostrom is the kind of person who
would sayÉhow do the fishermen not have a fishing game disaster. So she has had
a major impact in terms of like bringing reality into the academy in terms of economics.
She calls herself a political economist. I think that's a very appropriate
term. And if you read anything that she rights, you will be enlightened. She's just
really a veryÉis that a drip? So Lynn Ostrom, awesome. Ollie Williamson,
awesome. Although he does get the Nobel Prize winning parking place I hear.
I'll get more into property rights as we go down.
Oh, pop quiz. So this is not for a grade in the course. This is just merely for pride.
I have a colleague in Norway, and he was upset
that I was not clearly labeling my axes. Who here thinksÉthere's a choice here.
You get a choice of P or Q. Who here thinks that P goes up here on this axis? Raise
your hand. Who here thinks Q goes on this axis?
Supply and demand, what is that? P and D. Supply and Demand. Extra points. Who
thinks that the price goes up there? And Q? Okay, you hear that? Alright. Shut up. They
understand. Okay I sent out an e-mailÉI guess as part
of myÉyou all pass. I can't write. That was like one of those subtle hints, you know?
It's P! Corporate social responsibility. I sent along
a bit of an e-mail to you guys. It wasn't spam. This is an opinion, but you can write
it down. It's going to be pretty big. Corporate social responsibility means that
profit maximization is not the point of a firm. Now in economics we talk about optimization,
we talk about utility maximization, we talk about profit maximizationÉso
corporate social responsibility is, "Oh, you're a corporation. You're Federal
Express, you're Walmart, or whatever. You know, that price maximization isÉyou're
really trying to pay your employees less so you can make more profits. But you're
trying to buy goods for less and sell them for more. You shouldn't do that. It's
just not nice. What you should do is pay your workers more
and make sure you contribute towards the government, and take care of your
communities, or something like that. That's kind of aÉand I agree it's a strong
aversion of a corporate social responsibilityÉbut corporate social responsibility
is kind of a code word for everything that we think is a good idea. We:
an activist group. I meanÉeven if that conflicts with profits. Now my opinion about
this is that it is a huge problem. And the mainÉthere's two explanations for this.
There's neoclassical economic explanation, which is the traditional explanation.
Because the job of the company is to profit maximize. That money will go to
shareholders, and the shareholders would send it to charity, or to the community
or whatever, right? If the company goes around and saysÉohÉwe're
not going to do that. We're going to take care of the endangered species in
the Gulf of Mexico. OrÉwe're going to build a children's halfway house or whatever,
then the corporation kind of loses sight of what the hell it's supposed to do,
okay? In Germany it's very common, it's very famous,
that they have workers on the boardÉit's called the board of advisers or
something like thatÉboard of stakeholders? In companies now they have worker
councils that are voting on corporate policy. So what happens here is
that the workers will say: Well, profit maximization means lowering our wages. We
want higher wages. And so potential the wages will go up. Well this becomes good
for the workers, but not necessarily good for the company. It weakens the company;
especially if it's a German car company competing with, for example, a French
car company, which doesn't care about their workers. So then that German company
actually may go out of business. And the workers are really in trouble because
they have no jobs. Much worse than that is when they say they're going to support
the environment or social justice or whatever. Not that those things are not a
good idea, but when the corporation goes and does that, then the CEO takes a bunch
of money, goes over to the charity, delivers the donation, gets the photo, and
then goes back. And who knows what that did for the company, right? Even worse, the
charity might be run by the CEO's wife. Even worse, the charity might be paying him
a backhanderÉa bribe to donate the company's money.
So the problem with corporate social responsibility is it quickly blows up intoÉlet's
do everything right for everybody, and the company loses concentration on what
the hell it's supposed to do, which is to make money, okay?
If the company makes money and gives it back to shareholders in terms of
dividends, then the shareholders decide how do donate that money according to
their own personal desires. If I'm a shareholder in the company, and the company is
supportingÉlet's say they're supporting the San Francisco 49ers because that's a
good charity, and I'm a raiders fan, I'm not a happy shareholder. You see, there's a
bit of a problem there in terms of incentives. The principle agent problem we talked
about before. So this is, as far as I'm concerned, an evil idea, but if you like it, go
ahead and volunteer for those guys. And that's my opinion for the day about CSR.
Right. Any questions about that? You said you had two explanations?
Well the main prospect is that you donate the money to the shareholders, and they'll
do the right thing. The next explanation is more like green washing and corporate
propaganda. Like Starbucks (I looked at this one time)
and fair trade coffee. They were spendingÉI think they wereÉso their whole
idea of fair trade is cut out the middleman. That actually creates all kinds
of problems because now all the middlemen are out of work. You cut out the
middlemen, and you sell all this stuff to your customersÉinstead of 12 dollars a pound,
which is already too expensive for coffee) you sell it for 15 dollars a pound.
Of those $3 (maybe 15 cents goes back to the farmer who's being helped. The other $2.50
goes back to the bottom line. That goes to profit. So in a sense it's a kind
of advertising. And it getsÉpeople are like, "Oh my god I'm
saving the environment by buying $15 a pound coffee."
And the farmers down the road might be getting more money, but then the thing
that I was thinking about was when you cut out those middlemen, now they really
depend on Starbucks. So if Starbucks cuts them off, now they're screwed. They
don't have a marketing channel. So I think Starbucks (when I looked at itÉit was a
while ago)Énow I think they're the biggest buyer of fair trade coffee in the world.
But Starbucks only runs aboutÉI think it's way less than 5 percent of their coffee is
fair trade. So they have all these fair trade signs in
the store, but they don't have the 95% of the
store advertising space dedicated to evil coffee that we buy everywhere else. So it's
more of a green-washing advertising scam. In the Germany exampleÉI think that system
works for them. Germany had the highest percent of renewable energy of all
the countries in the world, and the largest percentage of that is from private companies.
But why do they have the highest percentage of renewable energy? Government
subsidies. No.
No? It's because of government taxes.
Ah. Well government taxes or government subsidies. Take your pick.
Well it's different though [Yeah?] becauseÉI mean I agree, it's also subsidized.
They subsidize solar, for example. They subsidize solar.
But they tax other energy. But I think just generally everythingÉthere's
much more incentive hereÉ Because of conservation, yeah. So it's not
because of corporate social responsibility that they're doing renewable energy. It's
because it's profit maximizing or subsidy maximizing.
What do you mean by governmentÉ Right. That's a different question. This is
an interesting thing. The whole Wall Street blow upÉbribery of politiciansÉwhen
I look at bribery negotiation, I've got my company here, and myÉwhat's a symbol for
a politicianÉmy politician here. Now the politician has market power. They're
monopolists, right? The company is competing with other companies. And they're
all offering bribes to politicians to get privileged access to a market or product or
contract or something like that. So all of them are offering bribes to the politician.
It's definitely a bilateral deal. They are making a deal with each other, but the person
that's wielding their power to crush society (in a sense), polluting the environment,
is the politician. We should not be surprised that the firms
want to go around (remember I read that quote from Adam Smith) trying to bribe politicians.
What we should be surprised or upset about is the politicians betraying us,
right? So that's what pisses me off. Is bribing a politician in lineÉbribery,
remember, used to be tax deductible. It was a
business expense. I don't know if it's still tax deductible in some countries. But
bribery used to be considered a tax deduction. And that's a legitimate business
expense. And those firms are all trying and competing against each other taking
advantageÉthe person how is allowing him to bribe is the politician. The politician
can say no, and then they can't do anything because the politician is a monopolist or
a monopsonist in this case. So in terms of likeÉmountain top renewal
and stuff like that, most of that is enabled by politicians and the companies are maximizing
profits given the regulatory environment. If the regulatory environment
would change, they would not pollute. So they have no responsibility?
Nope. Just their shareholders. And meeting the laws, right? But who writes the
laws? Back to the politicians. If you say that that's true, in some countries
aren't the politiciansÉwell the companies that are making profit are theyÉThen you
wouldn't blame the company for that? But what outcome are you talking about? The
polluted environment? So say that America has strict regulations on pollution.
And the firm goes to Mexico and they pollute there.
So do I blame the American government for having strict regulations on pollution?
Or do I blame the company for going to Mexico and polluting under the laws of
Mexico? Or the corruption of Mexico? I would blame the Mexican government
because they can't get their act together. Inaudible
If I had to place blame, who would I place it on first? I would place it on the
government first, company second. How do you fix that problem? Let's say that the
government in Mexico is not corrupt. Is the government going to pollute? No. that's
how you fix the problem. So what do you think about if an American
politician saidÉwell you can only sell your product in America if it was produced in America
under our regulations. You cannot go to Mexico.
This is a notion of exporting social justice, which is debated back and forth, and that
makes more sense in the same context of regulating pollution in a country. So the
idea of polluting earth discussion is the whole problem of fear that if we have clean
foodÉI read the other day that some huge numberÉsome 76 million Americans a
year are stricken by food poisoning? As a percentage of the population, this is
likeÉ200 times the rate in France. And you know French cheese is good, but this is
some serious difference. So that has a lot to do with the failure to
regulate food safety in this country, and the
complication of our market, which is a big market. I was an ag-econ at Davis, right?
I swear I heardÉit was likeÉwe feed plastic
sponges to cows, the cows eat them, they shit them out again (because they can't digest
themÉthey're plastic sponges) but it helps them gain weight, right? We do that.
And I was likeÉI'm not sure if I want to eat that cow. It's a good reason to be a
vegetarian in this country. Or mad cow disease. Let's just feed diseased animals to
other animals. So I'm not saying there's not problems in all these different
countries, butÉso anyway back to theÉ You raise the standard, and you say that US
beef shall not have sponge-fed beef. And we will not allow sponge-fed beef to come
fromÉParaguay (which is of course grass fed beef). That would make sense in terms
of the alignment of the regulation. That would make sense, and even if theÉyou knowÉinspectors
the board or of this country are willing to be bribed to let in
the black market beef then okay, we get back to that problem right? That's back to
the corruption and regulation. So I'm lookingÉwhat I talk about when I talk about
government failure and market failure, they are both important problems, right? And
in the case of corruption and bribery and all kinds of law breaking, you have to
look at who is enforcing the laws. Not who's breaking the laws. I meanÉmurder's
illegal; people still do it. So it doesn't necessarily fix everything.
Other questions on this? I realize that it's a hot topic, and I will talk more about it,
and I think it's important. But I think it's important to think about the way to fix the
problem, right? Asking companies to do the right thing is wonderful, but you have
to ask what environment they're in. What rules and norms and laws they're
behaving under. What incentives they face. I would be very happy to shoot the CEOS of
firms that, you know, kill people. They go to jail and stuff like that, but it's not
a problem. Especially when they're breaking the law.
Pop quiz, CSRÉprice discrimination. Next topic. So this isÉ
Price discrimination is the idea of taking advantage of some characteristic in your
customers in order to charge them more money to attract more profit. It's a very
popular idea for the company side of things. Let's say that we have a demand curve.
And let's just say the firm has a supply curve like this. That's why I label these axes;
I always label them wrong. So in this circumstance, let's say the monopolist,
we're going to set price here, and we're going to get this revenue. This extra
profit is monopolistic profit for the firm. Now the firm is happy to make more money that
charging marginal cost equals price, but the firm is not happy about losing
triangles A and B in terms of revenue or money, right?
So what's called first-degree price discrimination essentially is charging
everyÉbecause this is an aggregate demand curve. Many, many consumers, okay?
So there's somebody up here that's willing to pay this much. But they're only paying
this much. This person is getting the surplus. The surplus is the entire difference
between what they're willing to pay and what they have to pay. That's just the basic
definition. You guys understand that part? Yeah? Okay.
So what the firm wants to do is they want to charge this guy, let's call this guy Mr.
X. Wants to charge Px to Mr. X. And there's going
to be a Py, Pz, Pa, and aÉthe firm wants to charge different prices for different
customers so that the entire area is collected as revenue. That's called first-degree
price discrimination. This is a definition that you need to know.
What does the first degree cover? There's a first, then there's a second, then
there's a third. It's likeÉlet's call it this
wayÉthe most advanced form of price discrimination. In fact if you're doing
marketing or health, and you say, "I'm going to give you the most advanced form of
price discrimination" all the executives will pay attention, right? Because this would
be what they want to do. Because the consumers who face that price would be
literally indifferent between having a product and not having a product.
So in economics we sayÉoh we're indifferentÉwe charge epsilon less. We charge a
little bit less. This is where this Greek letter epsilon pops up. We charge just a little
bit less, so if that product is worth 10 dollars to you, we'll charge you $9.99. You get
one penny of utility, one penny of surplus. The other $9.99 goes to the firm and they
use thatÉit goes to their bottom line. Now what's the problem with 1st degree price
discrimination? Realistically. So figuring out who that firstÉso it's actually
tying the price to the consumer. That's the first problemÑhow do you tie that priceÉso
you, I know your value. You're 9.99, and you're going to pay me this much.
What's the other one? Making them actually pay that price?
Making themÉso making them pay that priceÉwhat happens when this consumer
over here decides to sell to this consumer over here, take the profit, and go home?
So there's a possibility ofÉthose consumers can trade among themselves. That's a
problem as well. What's another problem? Cash left on the tableÉlike another company
could jump in. Could be, yeah. It's a monopoly right now,
so let's leave that one alone. How do you limit that price to only these
consumers without discouraging other consumers?
So that some consumers might see one price and be upset that the other person is
getting a different price? Yeah, sort of.
SoÉjust the whole equity issue. Like I'm paying one priceÉwhy am I paying one
price and you another price. Actually that's a good example because a couple
years ago Amazon started trying to do differential pricing for books on their
website. Did you ever hear about this? They know your profileÉyour zip code. Your
zip code says what tax bracket you're in, almost, because you can link it to census
data. And one person would have a price of $12 and another person's would be
$15. Because they have a willingness to pay, right? Income elasticity, normal good,
willing to pay more, why not charge more?
They just got caught trying to maximize profits, but it goes against the norm that we
have that everybody pays the same price. That's one thing. Except that they don't
because we're facing price discrimination a lot.
Is that illegal or not? It is legal to charge different prices to
different people. Go down to the farmer's market and negotiate tomatoes.
Yeah, I know but that just got a lot of heat to them.
They got heat, yeah. In some ways people didn't expect it. It's likeÉI know you're
going to cheat against me, but then I get to cheat against you. That's the thing; you
think it's the same price. Just like when you go shopping on these airline
aggregator things. You start looking at rates and go to this rate, and this rate,
and this rate, and the prices are changing every 20 minutes and it's because the airlines
are trying to discriminate against you all the time. But you know they are.
Wait so for progressive taxÑdo you that's a form of price discrimination?
NoÉoff topic. Okay the one thing I think you guys are taking for granted, but it's
really important, is that a firm really doesn't even know what this demand function
looks like, right? That's a huge problem. And this is somethingÉI just sit there and
I just draw the demand and supply and here we areÉequilibrium. But remember there's
almost no firm in the world that knows what the demand function looks like.
They have entire divisions of marketing people trying to figure out what
demand is for various goods. Especially new goods. Also even old goods.
So that's the biggest problem. Number one: we don't even know what the demand
function looks like. Number two: if we could do it we have to figure out how to get
that price to that consumer without that consumer buying it from someone else.
And third, or fourth, or fifth, or whatever: we would have a problem with the
consumers getting upsetÉso just equity. Just being charged a different price.
Okay, so that's just first-degree price discrimination. Can I erase this?
Second-degree price discrimination is something that you're all familiar with. It's
basically called the quantity discount. So this is quantity discount. The first thing
is kind ofÉit's called walking the consumerÉwalking
down the demand curve. That's the idea here. You're walking the consumers
down the demand curve. You can call it that. It's a good way to think about it.
Okay? So second degree is a quantity discrimination. Here's a simpler example. So
what the firm does is they setÉbasically what happens is if you only want to buy one
unit you have to pay $4. Okay? But if you buy three units, it's two dollars each. It's
like buy 2 get 1 free. It's not buy one get one free. I'm buying one already. That's
kind of dumb. Why not get one free? But if you have buy two get one free, or if I buy
a big chunk of minutes on my phone plan, or if I buy a big bag of rice versus a little
pound of rice. That kind of thing. These are different versions of quantity
discrimination. The thing that's important about that is that you don't need to know
anything about the consumers. That's really helpful, right? You just set the
priceÉconsumers walk in, and they sayÉoh wow I'm going to buy a lot, and I'll pay a
low price. And I'll pay that big price. And that'sÉsomeone will buy that package,
and the person will say that I only want unitÉI don't care aboutÉsee I can pay four
and get one unitÉI only want one unit. I know that I could pay two more but I don't
want three units. You see how people will sort themselves out
into kind of two different categories? Does that make sense?
The company has an easier time doing it, and that's why in some ways first-degree
price discrimination is theoretical because it's very, very rare to see it. But this is
very, very common because this is an easy thing to do. My favorite example of kind
of quantity discrimination is the so-called two-part tariff.
And this isÉimagine that you go down to a bar. What's the big bar on Telegraph that
has cover charges? Is there a bar on telegraph that has cover charges?
Blake's. Blake's? Okay so Blake's on Telegraph has
ladies' night. Have you ever heard of guys' night? Now think about this for a second.
So what's going on is they actually charge the price equal to marginal cost for
beer. And then a guy will come in. And the guy has a bigger demand curve because
they like beer more. I'm doing some stereotypes. Okay so lately, there's chug-a-lug
girlsÉjust stay with me for a second. Chug-a-lug girls love ladies night at Blake's,
right? I get in for free, I drink as much as I want at marginal cost.
But the ladies' kind of have a lower demand curve, and then what happens is you
charge price is equal to marginal cost for beer, but then you charge the guys a cover
charge. And the cover charge is the area of the surplus that the guys are getting
from the beer. And the ladies, right? If there's no ladies then everything collapses,
right? That's one of these interesting things as well. Unless it's Blake's on Castro. I
bet they do haveÉI don't even know what they have. It'll be some form of price
discrimination. But what they do is they're basically sayingÉyeah come on in, drink
as much cheap beer as you want, but you're paying $10 at the door, and there are all
these girls in there, but they got in for free. The girls probably only had one beer,
and they only spend like $2. And I'm in here for free. And the bar is making all the
money off the guys. That's the classic form of a two-part tariff.
Two parts: one price for the beer, one price for the cover charge. The company is
getting all
the surplus money (for this hypothetical). They're getting all the surplus
for the guys; they're leaving this on the table for the girls. Could be a discount or
whatever. They leave it on the table where they just make it smaller. And there was thisÉthere
was that interaction ofÉnot enough girls and guys come inÉjust take it
into account that that matters. Or maybe you could do itÉyou could do it
like this, and just do a cover charge for the
guys. They're like $10, but there's no girls, what are you talking about? That's part
of the reason why it's ladies' night also. It's a combination of factors. Actually the
ladies' night thing is more like a third price discrimination. And I'll get to that in a
second. So this is combining two. So third degree discrimination is based on some
observable characteristics. That was observableÑguy, girl, guy, girl. Another
typical one: student discountÑshow me your id. Senior discountÑshow me you're
old. Movies on Friday night versus Saturday night.
So what you got there is you've got your two different demand curves, and you've
got your yuppy here. You knowÉmiddle-aged, but high income. You've got your
senior here: older, low income. You want to get both of them in for the movie. And
you look at the senior and say: "You're old." You get in for whatÉit's only $7.50 now.
And the yuppy has to pay $10 or $9.50 or whatever the price is, right? That's third
degree price discrimination. It's based on an observable characteristic.
So the bar example is actually a combination of second and third degree, right? This
is a very pure third degree; this is a pure second degree. Just so you don't get
confused. What happens if your yuppy is a student?
Oh, good idea to keep you're fake id. You slip under the screen, basically because
you just do that. That'll happen. It's kind of hard in a sense. Not common. Other
question? Inaudible
For the yuppy you can just do a pure monopolistic pricing mechanism. You just set a
high price and a low price. Does that make sense? Yeah?
So do price discriminations only work in monopolies? No. So in perfect competition everybody goes
down towards marginal cost in terms of their pricing. So with perfect competition,
the movie theaters would compete away that price discrimination so there would
not be price discrimination. But you literally could have one theater, and another
theater a couple blocks away, and now they're not perfectly competing because they're
likeÉapart. Or they're too far apart, right?
Or it'sÉour movie starts at 8:30, your movie starts at 8:45. It's really easy to get
away from perfect competition. And as soon as you start to move away, you start to
see these price discrimination things pop up. Sometimes you'll see this industry
norm. Everybody in the industry is going to be like yeahÉwe'll charge seniors less.
Because they understand this. But also it's kind of like heyÉif you do it, I'll do it.
Right? It's kind of a gentleman's agreement. So theaters
are giving it to the consumers in a way. It's because the theaters areÉwhen you
find out that as soon asÉwhenever information service pops up and makes comparison
easier, it starts to erode price discrimination. The internet has been huge
for that. You can go on the internet and type in the name of the model of any digital
camera, and you can see all over the United States who's selling that digital camera.
Whereas in the old days, you have to go down to the corner camera shop. Oh I'm
going to New York to buy a camera there because it's cheaper there. That didn't
happen anymore. You just look on the Internet. So as soon as information flow is
faster, price discrimination tends to decay.
So would an alternative be a price in between those two, or would it just be another
price? The firm was aggregated to demand curves so
it would beÉthat's kind of a messy drawingÉbut let me try and draw it here.
It would start off as a yuppy, and as soon as this guy came in, it kind of changed, right?
And you get a much more complicated revenue curve, but the firm would try and
discriminate against the entire aggregate demand curveÉwhat it thinks that is. That's
the other problem. But you know how for movies that are sold
out, and people have to wait in line for like 2 hours for? Why doesn't the firm or the movie
theater charge higher prices? That's an ongoing debate in economics. I told
you about Bruce Springsteen's (The Boss) concert ticketsÉhe's selling them for
$60. He sold out in 20 seconds. And they were selling on the black market for
$600. So why is that going on? So Bruce Springsteen is leaving a lot of money
on the table in terms of money he can charge. A whole bunch of money is going to
transfer, essentially, to scalpers, or people who actually just resell the tickets,
so it turns out a lot of those tickets are actually being held by Bruce Springsteen and
his family. Like the entire floor of the stadium was owned by him. That was even more
crazy. So why are they doing that? The most common explanation of likeÉeconomic
analysisÉoops we messed up. Or we want to do the right thing, which is another
idea. SometimesÉbecause the poor people can afford to wait in line for 24 hoursÉthat's
one way to get them a ticket compared to a rich person that can just buy
it on the black market. But the poor people will wait in line for 24 hours and
then sell that ticket to a rich person for $600. So I don't knowÉmaybe that's helping
the poor person. Either they go to the concert or keep the money. The other reasons
that lines are good is because lines make the place look popular.
What's that Sushi place on Shattuck? You know the one that always has a line
outside? Giralla? I went there for the first time in my life. It was okay. Why do they
always, always have a line outside? I meanÉthey should be raising prices. Maybe
it's becauseÉoh there's a line out there. I should go there some time. So it's kind
of a marketingÉfree in a way. Unless it's raining.
Other question? Inaudible
Quantity based discrimination? You're right. It's not. SoÉquantity discount.
They're saying it's the same price for the marginal discount of the beer. So
everybody's facing the same price. Given that what you said thereÉhere's the way it
could beÉa secondary price discrimination. Say that everybody pays the same cover
charge. What you're going to do is you're going to end up with a Blake's full of guys.
Because the cover charge might be $5. The average guy's surplus is $10, so he's
making it. But the average girl surplus might be $4. So she's likeÉforget it I'm not
even going. So that would be a form ofÉtwo-part tariff is a type of quantity
discrimination that way. Without the gender thing. Any other questions on this?
Let's get into some jargon. The word shadow value. This is a clarification. I might
have mentioned this before, but I want to make sure you guys understand this.
Shadow value happens when you don't have a price. So the other day I mentioned
what happens when you set a price ceiling (forget the supply curve, sorry about
that)Éyou set a price ceilingÉno I do want a supply curve, sorry. So you set a price
ceilingÉhere's the market clearing price, and you set a price ceiling here. And the
demand is greater than the supply. So there has to be some way of rationing that
good. I think what I did was I said that this is P1, and this is Pt, and Pt equals P1 plus
P2. So P2 is that difference here. I have been screwing up this diagram too many
times. Do you guys remember that? When I wrote that up? No? Well we'll do it
again. So the government sets the price ceiling. That's P1. That's cash.
Now there will be a shortage of goods at that price because the supply is less than
the demand. And the market will clear because consumers will essentially spend
this distance or this area here. They'll spend that in terms of time or transactions
cost trying to acquire those goods at P1. So they will pay a total price (Pc) equal
to the cash price (P1) plus this differential
called time. So that's the example of the cheap tickets to the concert or the cheap
tickets to the movie. Oh, the ticket only cost me $6, but I waited in line for four
hours. So Pt equals $6 plus four hours. Now this is usually called a time cost. I don't
want to get my jargon wrong. And I very easily get that wrong. The price is based
on the cash paid plus the additional resources expended.
It's the cash plus the additional resources used to acquire that good. Or the
additional price. It reflects both costs. Shadow value essentially isÉit means a
nonmarket value. And in that example, the nonmarket aspect is time. You've got
money, which is the market exchange. Yeah I went to the front of the line and paid
$6, but my time is this kind of weird thing. I paid it because it was valuable to me.
So what about the person who get's in line, stands there for 3 hours, and after 3 hours
he decides it's not worth it anymore. Is three hours a deadweight loss?
That would beÉin a sense it's kind of a transactions cost. So it's the same idea
ofÉI've got a house for sale. And say that the market value is 200 thousand. And I
sell it for a hundred thousand. A whole bunch of people are competing for that
house. All those people are putting effort in to get that house, right? But only one
of them is every going to get it. So it's a whole
bunch of wasted effort. And that falls under that whole transaction cost category.
So the cost of selling that house was not the 100 thousand dollars spent. It wasn't
even the 100 thousand plus the difference that the winner paid. But it was
theÉwhat everybody else paid trying to get to that good. So in a sense it is a welfare
loss, and a deadweight loss would be right. I would use that word.
So the transaction costs would be deadweight lossÉ
No, they're not the same idea. They're similar ideas. Both of them are decreasing
social welfare, right? And sometimes the transaction costs might be so great, that
you should never even have gone down the road of transaction in the first place. It's
a social negative welfare. It's kind of like if I went down to the quad and I threw a
hundred dollar bill down in Sproul and there's this riot and somebody ended up in
the hospital. And somebody got the $100, but there's like $1500 of medical damage,
and all these people got bruises. It's likeÉI can destroy social welfareÉactually war
is a good example of social welfare destruction. So the shadow value is the amount that's not
your price paidÉit's your nonmonetary valueÉ
Yeah, I'll give you a better idea of shadow in a second, but it has to do with not price
cost. So if you think price/not price, that's a good place to start. But it's kind of a
vague concept in terms of these diagrams. So if you labeled that graph, where would
the deadweight loss be for the price ceiling? Is it the same for when you have the shadow
cost? So the deadweight loss from a price ceilingÉthis
here is allÉthat rectangleÉis all cost of queuing. That's a time cost. It's
just cost. It is a deadweight loss in a sense that in a market, if they had been able to
pay that price in terms of money, the money would go from the buyer to the seller.
So it's just a transfer of welfare, right? This area here is a different deadweight loss
related to the price ceiling. That triangle. So there's a whole bunch of loss
going on there. That's theÉI guess that's one way to look at it. And this one will be
related to queuing costs. This is related to
reducing the number of transactions in the market.
So when you ask the classicalÉwhere's the deadweight loss for a price ceilingÉit's
still that triangle?
No, I would clarify that this is deadweight loss, and this is deadweight loss. That's
welfare destruction. It's time being spentÉif it were money, it'd be very simple. It'd
be likeÉhere's $5. It's just a transfer from one person to another.
So let me look at a counterexample right next to that. And I'll take the other
questions. This is an interesting topic. So say that a monopoly comes in, and they
try to do the same thing and use price discrimination. So the price ends upÉPt is the
same price. Let's say Pt is the same price. But now what's going on is that we have
this deadweight loss from the monopoly. The same deadweight loss of reducing the
number of transactions. But this difference here is money transferred from the
consumer to the monopoly. From a social welfare perspective, that is not a loss.
Because social welfareÉthe aggregate is the same. But this is a lossÉit's just like
time wasted. Resources, in a sense. Other hands?
So for shadow valueÉyou can say bribes is a shadow value?
NoÉbribes falls into a different category related to corruption and principle agent
problems. But let's say you're selling a house, and
someone says I'll give you a $100 thousand and
a car, then would that car be like a bribe? But that's a monetaryÉ
That's a monetary bribe. A hundred thousand plus a twenty thousand dollar car. Or
a 50 thousand dollar car. So that's just cash flow.
So the distinction between the shadow value of four hours waiting in line and the
opportunity cost is that the opportunity costs is measured in money, in money terms?
Or is there another distinction? No, you're right. The definition of waiting
in line is an opportunity cost, and it has that kind of cash value of lost something.
And it's a loss. It's still a loss. It's still a
deadweight loss. It's not strictly a shadow value. I'm trying to get at the idea of
nonmonetary stuff. So look at it this wayÉyou do your little Venn diagram. Here's
shadow value, and here's things like queuing in line, and stuff like that. Lost time.
opportunity costs. But they're all nonmonetary, right? I'll give a better example in a
second. Other hands? So with airline ticketsÉthere's a [inaudible]É
is that price discrimination or transaction costs?
That's essentially a price discrimination product. Essentially they're selling ...they're
definitely sayingÉyou as a businessperson want that flexibility. Regardless of
businessmen actually charging it to their firm. And the discount traveler is willing
to give up some flexibility to get the cheaper ticket. That's second-degree price
discrimination. Because anybody can get a business class ticket. You don't have to
be a businessperson to getÉbut business people do buy it.
If we're not paying the actual cost for water (the real cost) does everybodyÉ
That's my exampleÉhold that thoughtÉthat's my example that I want to get to.
Inaudible They're reducing the opportunity costs if
they're multitasking. Well negative not likeÉoh god evil. But negative likeÉI would
rather not do it, right? I mean some people like hanging out in lines.
I don't go to random lines and hang out with people for a while and walk away.
If you do that, then you like hanging out in lines, right? But most people don't want
to hang out in lines. What people do is they minimize the costs of hanging out in
line. That's why there areÉthe commuters that are driving from the valley into the
city. They say, "oh yea, I listen to the radio on the way, I eat my breakfast, I do my
makeup." It's like yeahÉwouldn't you rather not have
2 hour commute? Oh well, actually I would.
So they're trying to lower that cost of that commute. Shadow value represents the
cost you are willing to pay to get what you want. But you never want to pay it. It's
the same way it's likeÉremember the protests. I don't want to pay more money for
my fees. Yeah, who wants to pay more money for their fees?
So I just want to clarify. So you say shadow value equals nonmarket, so when you are
looking at the price of a perfectly competitive market, do you consider it shadow value
orÉ In a perfectly competitive market without
externalities, and stuff like thatÉno shadow values, right? Everything's cool.
And there's no price in the shadow value. If the market hasÉ
If there's a non-price type ofÉI mean there's notÉwe're talking about non-price
valueÉopportunity cost is one wordÉthis isÉyou knowÉI'm claiming thatÉso
shadow values are also another word that gets thrown around. I'll get to the water
example. That'll be a better example. I'm talking about missing markets, when you're
talking about the Venn DiagramÉ That's the same. Missing markets.
Didn't you say that it's the lambda value in the Lagrangian?
Yes it was. It was a shadow value of an additional value of income. So how much is
an additional dollar of income worth to you in terms of more goods that you might
buy? And the way the word is used again. So it's kind like one of those things like
utility. It gets used a lot. Remember at the beginning of the semester
I said that I'll be vague about some things, and we're going to be wandering around,
and you'll kind of get it after a whileÉbecause some of these concepts are
hard to nail down in terms of like a pure concept. But you should get a feel for what
I'm trying to say. And don't worry, shadow value is not on the midterm.
You said that bribes don't show up on shadow value, but what if you tell politicians:
"I'll vote for you." And that's your cost. Your nonmonetary cost.
I'm not going with that oneÉno. What about health costs? Like you can buy
some kind of food because it's like really cheap, but it's genetically [inaudible] so
you're going to get cancer? Not cancerÉI don't know.
In a sense, that's not reflected in the price. Shadow cost?
Like if you can buy some kind of meat that costs less, but then if you get sick after
you eat itÉ
Right. I think that would fallÉokay so if you know that it's a risk that you're
takingÉdo you really have good informationÑis one question. If you don't know,
and you're getting a cheaperÉoh this milk is only half the price of that milk, except
that it's actually yogurt inside. So if you really know what you're getting in terms of
that discount, then you're buying a different good. You're buying a decayed good.
Or you're risking your life. The same reason that some people take life threatening
jobs in exchange for a higher wage. We'll talk about value of a statistical life.
Let's stop the tape for a second, Fei, because we're on the margin here. And I'll set
up thisÉwe're doing okay. So the better example (and I'm sorry I started
off with the worst example) is something with environment or water or something
like that. So what we want to do here in terms of shadow values is we want
to sayÉokay look. Let's just say it this way. If there were a market for clean water,
we would have a supply and demand. Just like that. But there is not. So if there's
no market, then what happens is you have this P*, this shadow value. I should
get my ex-girlfriend to do this presentation because she did her dissertation on shadow
values. So we should doÉyou'll be willing to pay
P* for clean water. But there is no market. It's just likeÉthere's all the water out
there. It could be because there's no market mechanism, there's no way of collecting money.
It could be there's a commons, there's a free rider problem, whatever it
is. There's just not a market. And here's where this kind of matters. Forget this for
a second. What will happen is that there's no market, but people will value clean
waterÉthis quantity of clean water at that price, and they will make an effort to
get it in some way. So they can't buy it explicitly. They might move to a community
that has clean water. When I moved from Davis to Berkeley, I was
very happy to drink the tap water here. I couldn't pay any different price to get
that price in one place or the other; I couldn't reflect that value. But I had that value,
so you might change communities reflecting the shadow value of that water. You might
vote for politicians to have a clean water regulation or clean water program that will
reflect this value. In a sense, let's take the political stance for a second. If the
total value of that clean water to society isÉlet's just say Pq, then you should be
able to see votes in favor of spending money. Tax and spending right? Tax and spending money
to deliver that value. So and indirect way of delivering that value
to society. It's not a market good, but this is politics. Voting, right? We're on
political economy now. You can't get a market, so you try and solve
this problem of how do we supply this goodÑclean waterÑand you solve it through
political means. In this particular example, right? You might have to change communities.
You vote with your feet. What you're trying to do is you're trying
to get that item that is very valuable to you.
But there's no way of getting that price. Some communitiesÉthe exampleÉsome communities
might have a traditional cultureÉsay that there's a festival. A feast.
It's not economically rational to have a feast and invite everybody over and kill pigs
and stuff like that. But everybody does it because they have that cultural value that
they're willing to defend. This is whereÉthere's an economistÉone of
my professors in grad schoolÉhe says, "Never say culture. Because we don't know
what it means." But culture can be valued in terms of these
shadow values. In a sense that people are willing to sacrifice time or goods or
money or votes to try and get those items. They're not trading in the market. And if
they were trading (I mean sometimes if they culturallyÉthey shouldn't be trading
in the market). But they're valuable to people.
But if somebody who's in theÉlet's say a hunter in the forest who never uses moneyÉis
that all shadow value then? In some ways, yeah. So the hunter will be
sitting there going, "Let's seeÉI can spend an hour picking berries or an hour chasing
that bird" or whatever. But the probability of catching the birdÉyou know
it's expected income type of thing. It's based onÉthe values are there. That's more
valuable, or that's more valuable. Cost benefit. There's no money changing hands.
But because of that value calculation, the hunter'sÉthis a great exampleÉthe
hunter's actually making a decision which is whatever's economically rational,
right? And trying to decide what to do. So this is a similar example. That's a better
example. Do you hear that? The hunter example? You've got your hunter trying to
get the berries or get the bird. There's no money involved, but there's a valuation
that they're trying to pursue and spending his time and effort. Because we're doing
thisÉthis is environmental economics and policy. The environment is the biggest
shadow value in the world. People are trying to figure out how to do
stuff about the environment, right? And there are going to beÉit's not just amenity
costs of dying polar bears. I personally don't have a personal impact of
losing polar bears in terms of my starvation or something like that. But maybe
I like polar bears. Maybe I like the environment.
So you're saying that an externality is basically shadow costs in some sense?
An externality reflects a shadow cost. An externality could be if every time I pick
up this pen, she loses a quart of blood, right?
Or something like that. Or she loses $5. That could be an externality. So every time
I pick this up, she loses $5. That's an externality because it's not affecting me.
It's affecting her. It's cash. But maybe it's a
different thing, which is a nonmarket or noncash thing. So it's aÉthere's an overlap
between these two concepts. Just looking at a practical example like,
you know, the polluting and they're artificially low, and they're producing a certain amount
of pollution but it's not reflected in the price. That would be a shadow value to the
environment. Right, because shadow value will be where
you want to set those prices. But when you do have the externalityÉyou
tax it to make up for the externality at the same level? BecauseÉ
The tax will be set so the shadow value goes to zero. Or the shadow cost, if you
want, goes to zero. Shadow cost, shadow price, all these shadows around going on.
Let me get into this thing for right now. The label is called a Pigovian max. So
remember we've drawn these diagrams. Say we've got a Pigovian thing (activity).
And this is the market supply curve and it creates pollution.
You just put a tax on things so you shift up the supply curve by the distance of the
tax. It's called the Pigovian tax by this guyÉPigou. Who's English.
So that's just the name attached to it. And here's the huge thing that I was going to
mention with this, and then we'll get to property rights.
The problem with the Pigouvian tax or any of these ideas likeÉoh I want to get to
the shadow thing. It's almost like CSR. Corporate Social Responsibility. How do you
actually set that tax. Well we know it's bad. So the tax should be positive. It should
be this much positive or this much positive. If you set it too high, now the tax is too
high. You're going to have too little pollution (if such a thing can be set). People are
going to be like oh my god, how do we have too little pollution. What do you mean
we have too little pollution. It's like putting the baby seat in the airplane.
It costs whateverÉ$2 million dollars per life saved. But you can use that money
elsewhere. So "too little pollution" in a sense of opportunity
costs of having that program. You might have a little more pollution and use
that money elsewhere for a different activity. That's where you have the problem
of optimization happening. So in theory you want to have the Pigouvian tax;
we have a carbon tax on the atmosphere for example, on greenhouse gases.
But maybe we set that tax at the wrong spot. And then we're in trouble. That's
certainly not an argument against government taxes. It's tricky to set it at the right
level. Scratch that definition. Can weÉany more questions about shadow value?
It's a great discussion but I want to try and finish this, so we can hand your
homework's back especially. Oh good, we're not that far off actually.
I'm just going to say this as an example because we're talking about these
nonmarket nettings. Let's use this hereÉ I'm changing the graph here. This is where
the axes matter. I've got value and I've got time. And this is the concept called optimal
extinction, which is another thing that makes people throw up in their mouth
a little bit, but economists talk about it all the time.
So say you have an asset, and it's growing in value like this. And you have a different
asset that's growing in value like this. A or BÑwhich asset would you invest in if
you were a wise, rational, self-interested investor?
B. B, okay. Now let's say that B is coal mining.
And A is clean water. Does that change your answer?
Yes Now the value is actually including shadow
values. It's including amenity values. It's including opportunity cost. This example
is in some ways the United States exploited it's natural resources to become
a wealthy country. This example is going to mess with education about why many developing
countriesÉwe need to develop now, and we'll worry about the environment
later. So there's an idea thatÉit's probably a good
idea to pollute our environment. We'll pursue plan B because we want that value.
But wouldn't the two cross eventually, and A would be above B because the more you
go with B, eventually that is actually what makes A more valuable in the future, right?
Yeah, so the problem with optimal extinction is that once it's extinct there's no going
back. So that has to withÉI think in New ZealandÉthe bigÉI don't know if it was the
Do Do in the museum, but the bigÉthe Kiwi? The Kiwi's not dead yetÉor not all
dead. But the idea was thatÉlet's eat these big
nice birds now, because they're a good source of meat. In some ways, humans have
been very good at extincting things because they go after whatever is easiest
and cheapest and nicest first. And once that's extinct, they go find something else,
which is the next best thing. If we want to be like all ecological, we'd
be eating algae and jellyfish and stuff like that. All those high value lovely species
would be around. But instead we're going after the nicest things. Especially things
that we want to shoot and put on our wall. Rhinoceros and stuff like that.
So there's this problem with the way that we value things, and then going extinct.
And we're going to get into this a lot after the midterm so I just wanted to mention it
now in terms of something to mull over about. I suppose I call it the evils of
economics. Let me get to the value or neutrality of economics.
Things that might be evil aren't necessarily.
Let me get into property rights for a second, because this is a really useful concept
also. And Lynn Ostrom just won the Nobel Prize. We've got to help her out.
So the tragedy of the commonsÑthe game you guys playedÑthe fishing gameÑ
wasÉ The fish in the fishing game were known as
a common pool good or resource. And this two by twoÉthese are what's up there.
This is excludable. I'll define these words for you. Nonexcludable. This is rival.
Nonrival. Excludable means I can exclude you from consuming
it. I can put a fence around itÉwhatever.
Rival means that if I eat it, or if I have it, you can't have it.
So the most easy example of an excludable, rival good is like an apple. They're called
private goods. If I eat the apple, you can't eat the apple. The apple is rival, okay? If
I hold on to the apple, you can't have the apple.
The apple is excludable. The fish in the fishing gameÉthe fish were
rival. If I took the fish, you couldn't have the fish, or the candy. If I took the candy,
you couldn't have the candy. They were rival, right?
But I couldn't exclude you. In the first initiation everybody was diving in. I couldn't
exclude you from taking away my fish. Our fish. The fish. Right? They're all in the
common pool. A similar exampleÉwhen you have an aquifer
underground, and someone sticks a pipe down there, and someone else sticks a
pipe down there, and they're both pumping the ground water. Lynn Ostrom started
her work on this. These two people are trying to get at the same ground
water. It's a common pool good. How do you keep this
guy from taking more than his fair share or whatever and destroying that resource.
It turns out there's two ways to do it. One way is to move that good into a private
good. You make it excludable. You give somebody a property right. You say look.
You can only take half of the water in the aquifer. Don't worry about how you measure
it. You can only take half of it. The other half belongs to somebody else. That's
property right. But what Lynn Ostrom did is she saidÉwell
maybe there's a different way of doing it besides this whole privatization idea. Maybe
we could have kind of a cooperative environment and sayÉlook, we live next to
each other. How about I pump an hour, and you pump an hour. If I pump an hour, you
can pump an hour. So kind of a sharing idea. This kind of rules and norms.
The kind of stuff thatÉthey have these Balinese water temples.
And they had priests in the temples in Bali who would tell the farmers who could
irrigate where and when. And they're all talking to the gods. And after thousands of
years, the priests and the farmers and the godsÉthey all had this long interaction
until after a while, the gods got pretty smart about how to allocate that water.
Whether or not you believe in god, the Balinese temples did a good job at
distributing a sustainable amount of water across the rice patties. So that all the
farmers had food, nobody starved, and there was water for next year.
It's an extremely complicated thing to describe. That's why economists never go
there because it's too hard to think about. But it's stuff that has worked over many,
many years. It's a thing called culture. It's like many cultures, many nationsÉhas
anybody read the Ongoer's Dilemma? You know the plot of the Ongoer's
DilemmaÉthe theme isÉwe Americans have a hard time figuring out what to eat
because we don't have a native cuisine. We just go out there, and it's like fast food
row. Wow, look at all that food, right? And we just eat a whole bunch of weird stuff
where we don't know what it is, where it came from. And then we die of all kinds of
crazy things. You go to native culturesÉand around the
world you kind of see this rice and beans thing. Rice, rice and beans in Mexico, we've
got corn and frijolesÉI mean whateverÉall these countries you've got this
rice and beans phenomenon. In Napal they've got [inaudible] they have their own
rice and beans. It's got to be a balanced diet.
It's actually quite cheap. Usually very sustainable, right? They didn't have the
ongoer's dilemma because they just eat what their mother tells them to.
So why did we get off on that tangent there? Oh because it's kind of the rules and
norms and culture that we've seen evolve over the time. Lynn Ostrom is all about
the evolution of things over time. So you can resolve this overpoolÉthis tragedy of
the commons. This is tragedy of the commons right here.
You can resolve the tragedy of the commons by having property rights, which is a
simpleÉit's an economic thingÉor evolve cultural norms for managing that
property. Here we've got two other goods. Nonexcludable,
nonrival. Public good. What's an example of that. What's an example of a public
good? The air?
Air. Usually air. Radiowaves, basically. Air can be rival unless we close the door
here, and we all start dying. So nonexludable, nonrival if I use it, you can use it, and
I can't keep you from using it.
And over here we have a rarer one, but a fairly obvious one, a club good. You're in
the clubÉyou're either in the club or you're out of the club. If you're in the club,
you're not excluded. Let's say it this way. You're excluded if you're not in the club.
But if you're in the club, you can use as much as you want, and it's not rival. That's
why you get a golf club or a tennis club or theoretically, a health club. And
theoretically is whyÉ Is somebody smoking pot?
I know you guys have a lot of midterms right now, I'm sorry about that. We're just
trying to get through this. So a club good is like a golf club. And I'll
tell you a golf club that has like 16 members all trying to tee up at the same time
is not going to be a popular golf club, right? So what they try and do is they try
and constrain membership, so that there's always a free slot, so you can getÉthat's
exclusivity. They have to let in enough people so that you have enough people t hang
out with, but not so many people so you have a mob.
Club goods can move into rival territory. They can move into rival territory if
there's congestion. If there's so many people in the club that there's just not enough
space. In some ways you guys are like aÉthis is
a public good. Access to this classroom in this classÉthe 90 people Éthat's a club.
Right? You're in. But there's a 100 people. Then you're like oh my god, where am I going
to sit, where am I going to sit? Can the public good [Hold on, hold on, almost
done.] also move into private good if there's less of it? Like I think if you breathe,
then you use it. So it's going to go to rival, but it's nonexcludable.
Air can go into here. Alright, good luck on the midterm on Thursday.
Office hours right now.