Human capital Public goods Today: A wrap up of Econ 1 material

Today More applications of microeconomics Human capital Public goods

Human capital Human capital comprises of the characteristics that affect the value of the person’s work when hired The better the characteristics of human capital, the more a person is likely to earn

Some human capital qualities Education Direct knowledge Intelligence Signaling Training Work and life experiences Energy level Work habits Trustworthiness Initiative

Education sends many messages to a potential employer “I have learned everything needed to finish this level of education” “I am intelligent enough to finish this education, which probably means I am smarter than those without my level of education” “I am using this level of education to send a signal that I have other good qualities that you are looking for; others that do not finish this level of education can say the same thing”

Education and employment Many jobs require a minimum level of education to be considered for a job M.D. to be hired as a doctor License for many specialized fields Real estate Pilot High school or college diploma for many entry-level jobs

Education and employment The more education you have, the higher you are in demand for your services Exceptions: People that get a Ph.D. in the humanities often end up in the same type of job that they had before

Summary: Human capital Many characteristics form human capital Education probably most important for most people Human capital is valued by employers due to the fact that it increases a workers productivity

Public goods Public goods are goods that have some degree of two characteristics Nonrival Nonexcludable Positive externalities lead to suboptimal consumption when public goods are privately purchased

Definitions (all pages refer to F/B 3 rd edition) Nonrival good (p. 448) “A good whose consumption by one person does not diminish its availability to others” Nonexcludable good (p. 448) “A good that is difficult, or costly, to exclude nonpayers from consuming” Pure public good (p. 448) “A good or service that, to a high degree, is both nonrival and nonexcludable”

Categories of goods LowHigh Commons good (oxygen that you breathe) Public good (lighthouses) LowPrivate good (pens) Collective good (copyrighted books) Nonexcludable Nonrival

Categories of goods LowHigh Commons good (oxygen that you breathe) Public good (lighthouses) LowPrivate good (pens) Collective good (copyrighted books) Nonexcludable Nonrival Covered in earlier chapters; uses basic supply/demand theory

Categories of goods LowHigh Commons good (oxygen that you breathe) Public good (lighthouses) LowPrivate good (pens) Collective good (copyrighted books) Nonexcludable Nonrival Covered in Chapter 10

Categories of goods LowHigh Commons good (oxygen that you breathe) Public good (lighthouses) LowPrivate good (pens) Collective good (copyrighted books) Nonexcludable Nonrival Goods with copyright or patent protection have some level of market power

Public goods We will examine pure public goods Highly nonrival Highly nonexcludable Marginal analysis is used to find the optimal quantity Optimal quantity is where PUBLIC MB equals MC

Example Fireworks show off of a tiny coastal community 25 people live here Each person has the same private demand for fireworks P = 2 – 0.08 Q MC for fireworks is 10 Notice that if fireworks were publicly purchased, nobody would buy them (10 > 2)

Fireworks show as a public good Since one person’s enjoyment of fireworks does not take away from the enjoyment from others, PUBLIC MB is the sum of PRIVATE MBs PUBLIC MB is the vertical summation of all 25 PRIVATE MBs P = 25  (2 – 0.08 Q) = 50 – 2Q

Vertical summation Vertical summation of 25 PRIVATE MB lines produces PUBLIC MB line MC PUBLIC MB PRIVATE MB

Marginal analysis To find efficient level of fireworks, set PUBLIC MB = MC 50 – 2Q = 10 Q = 20

Summary: Public goods Public goods are goods that are nonrival and nonexcludable Private provision of public goods leads to a quantity provided that is below the optimal quantity Vertical summation of PRIVATE MBs determines PUBLIC MB Useful in determining optimal quantity of public good