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CHAPTER 4

CHAPTER 4. Public Goods. 0. Characteristics of Goods. Excludable v Nonexcludable Excludable – preventing anyone from consuming the good is relatively easy Nonexcludable – preventing anyone from consuming the good is either very expensive or impossible Rival v Nonrival

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CHAPTER 4

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  1. CHAPTER 4 Public Goods

  2. 0 Characteristics of Goods • Excludable v Nonexcludable • Excludable – preventing anyone from consuming the good is relatively easy • Nonexcludable – preventing anyone from consuming the good is either very expensive or impossible • Rival v Nonrival • Rival – once provided, the additional resource cost of another person consuming the good is positive • Nonrival – once provided, the additional resource cost of another person consuming the good is zero

  3. Types of Goods NATURAL MONOPOLY PRIVATEGOODS COMMONRESOURCES PUBLICGOODS

  4. Noteworthy Aspects of Public Goods • Even though everyone consumes the same quantity of the good, it need not be valued equally by all • Classification as a public good is not absolute; it depends on market conditions and the state of technology • impure public good • A commodity can satisfy one part of the definition of a public good but not the other • Some things that are not conventionally thought of as commodities have public good characteristics • Private goods are not necessarily provided exclusively by the private sector • publicly provided private goods • Public provision of a good does not necessarily mean that it is also produced by the public sector

  5. Some Other Public Goods • Basic research • Programs to fight poverty • Uncongested nontoll roads • Fireworks display

  6. 0 Efficient Provision of Private Goods

  7. $ 0 Sf DfA+E DfA DfE Quantity of Pizza

  8. Pareto Efficiency – Private Goods Case • MRSpa = Pf/Pa • Set Pa = $1 • MRSpa = Pp • DpA shows MRSpa for Adam • DpE shows MRSpa for Eve • Sp shows MRTpa • Necessary condition for Pareto efficiency: MRSpaAdam = MRSpaEve = MRTpa

  9. 0 Efficient Provision of Public Goods

  10. $ 0 Sr DrA+E DrA DrE Quantity of Fireworks

  11. Pareto Efficiency – Public Goods Case • MRSfa = Pf/Pa • Set Pa = $1 • MRSfa = Pf • DfA shows MRSfa for Adam • DfE shows MRSfa for Eve • Sf shows MRTfa • Necessary condition for Pareto efficiency: MRSfaAdam + MRSfaEve = MRTfa

  12. 0 Problems Achieving Efficiency • The Free-Rider Problem • Solutions to the free-rider problem • Perfect price discrimination • Policy Perspective: Global Positioning System • Do people free ride?

  13. Laboratory Experiments and Free-Riding • How a typical experiment works • Typical results • People contribute about 50% of resources to provision of public good • Contributions fall the more often the game is repeated • Cooperation fostered by prior communication • Contribution rates decline when opportunity cost of giving goes up • “Warm-glow” giving

  14. The Privatization Debate • Privatization – taking services supplied by government and turning them over to the private sector • Public v Private Provision: What is the right mix? • Relative wage and materials costs • Administrative costs • Diversity of tastes

  15. Distributional Issues • Commodity egalitarianism – notion that some commodities ought to be made available to everyone

  16. Public versus Private Production • Efficiency of private production • Problems in comparing cost differences • Incomplete Contracts • Competition to supply good or service • Reputation building • Policy Perspective: Should airport security be produced publicly or privately? • Market Environment

  17. Preference Revelation Mechanisms • ∆TEve = MRTra – (MRSraTotal – MRSraEve) • Eve’s choice: ∆TEve = MRSraEve • By substitution: MRTra – (MRSraTotal – MRSraEve) = MRSraEve • Add (MRSraTotal – MRSraEve) to both sides: MRTra = MRSraTotal

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