In the theory of public goods, the degree of rivalness of any good can be measur
ID: 1198855 • Letter: I
Question
In the theory of public goods, the degree of rivalness of any good can be measured by SMC/AC, where SMC is the social marginal cost of the good and AC is its average cost. a. In order for SMC/AC to measure the rivalness of TV broadcasts we cannot define SMC to be the cost to society of an additional broadcast. Explain why not. How must SMC be defined? b. Explain why using SMC/AC to measure rivalness allows us to compare the rivalness of any pair of goods or services that could be provided by a private business. c. Estimate the typical degree of rivalness of an agricultural product like wheat (give a number). Explain how you get this number using your definition in part a. d. Estimate the typical degree of rivalness of the service provided by an internet search engine like that provided by Google. Explain how you get this number using your definition in part a.
Explanation / Answer
a. The total cost to society as a whole for producing one further unit, or taking one further action, in an economy. This total cost of producing one extra unit of something is not simply the direct cost borne by the producer, but also must include the costs to the external environment and other stakeholders.
Calculated as:
SMC = MPC + MEC
Where in
SMC = Social Marginal Cost
MPC = Marginal Private Cost
MEC = Marginal External Cost (Positive or negative)
In this SMC cannot be defined for production of one addtional unit of output but should be defined as addtional cost because it is constant irrespective of number of units produced. Therefore, it should be defined as additional cost of rivalry when one more competitior enters the market.
b. SMC can allow us to compare the rivalness of any pair fo goods or services provided by a private business because rivalary is not dependent on output but on numbe ro ffirms in the market.
c. If number of firms = n, then rivalry = n-1 (excluding our own firm)