1 / 20

Public Goods Defined

2. Examples of Public and Private Goods. Public GoodsNational defenseA Clean House for family members Opera BroadcastsMusic file sharingUncongested freeway. Private goodsIce CreamHealth careOpera RecordingsHousingCongested freeway. 3. Valuation of Public Goods. Everyone consumes same quant

kenley
Download Presentation

Public Goods Defined

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

    1. 1 Public Goods Defined Pure public goods share two characteristics Nonrival – Cost of another person consuming the good is zero Nonexcludable – Very expensive to prevent others from consuming the good

    2. 2 Examples of Public and Private Goods Public Goods National defense A Clean House for family members Opera Broadcasts Music file sharing Uncongested freeway Private goods Ice Cream Health care Opera Recordings Housing Congested freeway

    3. 3 Valuation of Public Goods Everyone consumes same quantity of a public good Marginal benefit of a public good varies by person Examples: Clean house to family members Homeland security to citizens

    4. 4 Near (Impure) Public Goods Some goods that are thought of as public goods may not strictly satisfy the nonrival or nonexcludable assumption. An un-congested city street is a public good: it is both nonrival and nonexcludable. As the street gets more congested,however, it goes from being non-rival to rival as the number of cars using it increases.

    5. 5 Private Goods can Be Provided by the Public Sector In contrast to pure public goods, there are also “publicly provided private goods.” Key criteria to a pure public good: is it rival and excludable? Take Public Housing for poor people as an example. This is both rival (one family consumes one apartment) and excludable (easy to prevent consumption).

    6. 6 Efficient Provision of Private Goods Derivation of Market demand Each person’s demand curve represents the willingness-to-pay for an additional unit of a good Private good: holding P constant, add together individual quantities to get Q Horizontal summation

    7. 7 Equilibrium in Private Goods Market Optimal provision where supply curve (MC) intersects market demand curve Everyone pays the same price, P Individuals consume different quantities, Q Pareto efficient : MRSA = MRSB = MRT

    8. 8 Efficient Provision of Public Goods Consider an Opera Broadcast as a public good – it is nonrival and nonexcludable. More Opera programming gives each consumer a higher benefit, but all consume the same amount. Public good: holding Q constant, add together individual willingness-to-pay to get P. Vertical summation.

    9. 9 Efficiency in Public Goods Market Optimal provision still where supply curve (MC) intersects market demand curve But now, everyone consumes the same quantity, Q. Each individual’s marginal benefit varies. Pareto efficient : MRSA + MRSB = MRT

    10. 10 Efficient Allocations of Public Goods: The Free Rider Problem Although a competitive market will provide private goods efficiently, will the same be true for public goods? People might have strong incentives to hide their true preferences for a public good. If Georgia can get Nina to pay for the public good, she can use her income for other purposes and still enjoy the public good.

    11. 11 The Free Rider Problem This incentive to let others pay for the public good while still enjoying the benefits is known as the “free rider problem.” The private market may therefore fall short of providing the efficient amount of the public good.

    12. 12 The Free Rider Problem This incentive to free ride occurs because the public good is nonrival and nonexcludable. A person gets to consume the good even if he does not pay for it.

    13. 13 The Free Rider Problem Recall that in our example, Georgia’s MRS = 0 at the socially optimal output level. Georgia would have a strong incentive to offer zero (MRSG < PN+G) to any entrepreneur attempting to “sell” her the public good. She would still receive as much benefit if Nina paid for the entire level of provision.

    14. 14 Solutions to the Free Rider Problem Government intervention can potentially lead to a more efficient outcome. Government can use coercive power to force people to pay for public goods, through taxation. Free riding is not a fact, however. There are instances when individuals do act collectively without coercion. Laboratory experiments on college students contradict the notion that free riding will lead to zero contributions for the public good. Some suggest the results derive from a “warm glow” of giving.

More Related