Topics Today 9908

1
Topics Today (9/9/08)

• Classroom game and discussion.
• Announcements
• Read 2.3 in your book for Thursday.
• First homework assignment will be assigned on
  Thursday (9/11) and due on Tuesday (9/16).
• Discussion sections will start this week.

2
Classroom Game

• Break up into teams of 5 or 6.
• The winning group receives the contents of the
  first envelope, which includes between 10 and
  50.
• First envelope contains prize money.
• Second envelope contains list of teams eligible
  for the prize.
• Third envelope contains minimum scores to be
  eligible for the prize.

3
Game 1

• Each team receives four cards, two red cards and
  two black cards.
• 5 rounds.
• During each round, groups have to determine which
  cards to give up.
• Each group begins with 200 points.
• Each red card you retain costs you -2 points.
• Each black card you retain costs you 0 points.
• For every red card I collect, each group must
  take off 1 point from their score.

4
Game 1
5
Game 2

• 5 rounds.
• During each round, groups have to determine which
  cards to give up.
• Each group begins with 200 points.
• Each red card you retain adds 2 points to your
  score.
• Each black card you retain adds 0 points to your
  score.
• For every red card I collect, each group adds 1
  point to their score.

6
Game 2
7
Discussion of Game

• Strategy of the top team (s)?
• Give up red cards in game 1.
• Keep red cards in game 2.

8
Game 1 Externalities That Cause Public Bads

• Red cards are externalities.
• An externality exists when a person does not bear
  all the costs or receive all the benefits of his
  or her action.
• Public bads affect society negatively and are
  non-rival and non-excludable.
• Non-rival the damage the pollution causes to one
  individual does not reduce the damage to all
  other individuals.
• Non-excludable individuals cannot avoid being
  damaged by the pollution.

9
Game 1 Externalities That Cause Public Bads

• Collective incentive retain red cards (i.e.
  clean up pollution).
• Private incentive give up red cards (i.e.
  pollute).
• If everyone retained their red cards, all teams
  would have scored 180 in game 1.
• The highest possible score is 190, which is what
  you get if every other team retains their red
  cards and you discard.

10
Game 1 Externalities That Cause Public Bads

• How are property rights to the environment
  assigned?
• Each team had the right to dispose of any amount
  of its pollution (to use the natural environment
  for waste disposal).
• An alternative? Take the right to pollute away.

11
Game 2 Public Goods

• Red cards are a public good.
• A public good, similar to public bads, is a good
  that is non-rival and non-excludable.
• Ex/ Military protection.
• Ex/ Clean air.

12
Game 2 Public Goods

• Two types of public goods
• Pure public good both non-rival and
  non-excludable.
• Impure public good either non-rival or
  non-excludable, but not both.
• Ex/ Open access fishery.
• Non-excludable by definition.
• Rival, because every fish caught by one boat
  means that fish cant be caught by another boat.

13
Game 2 Public Goods

• For completeness, a private good is both rival
  and excludable.
• Ex/ A candy bar.
• Ex/ A car.
• Ex/ A computer.

14
Game 2 Public Goods

• Collective incentive give up the red cards (i.e.
  contribute to the public good).
• Private incentive retain the red cards (i.e.
  dont contribute to the public good).
• The highest possible score occurs to the team
  that always keeps their red cards, while all
  other teams give up their red cards.