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CHAPTER 4

CHAPTER 4. Public Goods. 0. Activity. Pull out a Piece of Paper. 0. Activity - Stand Up. Government Should: Keep Roads Safe Build Roads Require Liability Insurance Proper Noise Volume Seatbelt. 0. Activity - Stand Up. Government Should Provide Health Insurance for: Children

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CHAPTER 4

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  1. CHAPTER 4 Public Goods

  2. 0 Activity • Pull out a Piece of Paper

  3. 0 Activity - Stand Up • Government Should: • Keep Roads Safe • Build Roads • Require Liability Insurance • Proper Noise Volume • Seatbelt

  4. 0 Activity - Stand Up • Government Should • Provide Health Insurance for: • Children • Elderly • War Veterans • The Poor • Everybody

  5. 0 Activity - Freewrite • 5 Minutes of Free Writing • What should the government provide? • Consider your thoughts on: • Infrastructure • Education • Health Care • Defense • Income Distribution • Savings

  6. 0 Definitions • Excludable • preventing anyone from consuming the good is relatively easy • Nonexcludable • preventing anyone from consuming the good is either very expensive or impossible

  7. 0 Definitions • 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

  8. Types of Goods NATURAL MONOPOLY PRIVATEGOODS COMMONRESOURCES PUBLICGOODS

  9. Impure Public Goods • a good that is rival and/or excludable to some extent • Park • Popularity and Location

  10. Pure Public Goods • Everyone Consumes the Same • Missile Defense • Everyone Does Not Value the Same • Technology

  11. Some Other Public Goods • Fireworks Display • Safety Ratings • Basic Research • Programs to Fight Poverty/Income Distribution • Satisfaction is Consumed • Uncongested Nontoll Roads

  12. Privately Produced Public Goods • Public Goods Are Contracted to Private Firms • For example, private firms in the US operate.. • 37% of Fire Protection • 23% of Library Services • 48% of Public Transit

  13. Publicly Provided Private Goods • Rival and excludable commodities that are provided by governments • Public Housing

  14. 0 Efficient Provision of Private Goods

  15. $ 0 Sf DfA+E DfA DfE Quantity of Pizza

  16. Pareto Efficiency – Private Goods Case • MRSfa = Pf/Pa • Set Pa = $1 • MRSfa = Pf • Df => MRSfa

  17. Pareto Efficiency – Private Goods Case • MRTfa = MCf/MCa • MCf/MCa = Pf/Pa • What gives us this result? • Sf shows MRTfa • MRSfaAdam = MRSfaEve = MRTfa

  18. 0 Efficient Provision of Public Goods

  19. $ 0 Sr DrA+E DrA DrE Quantity of Fireworks

  20. Pareto Efficiency – Public Goods Case • MRSfa = Pf/Pa • Set Pa = $1 • MRSfa = Pf • Df Shows MRSfa • Sf Shows MRTfa • Pareto efficiency: • MRSfaAdam + MRSfaEve = MRTfa

  21. 0 Efficient Provision of Public Goods • Suppose this is the demand schedule for public goods? • How should the government value the 5th rocket in this case? How would it value the 7th, 9th and 11th?

  22. 0 Drawing Social Demand • Steeper Slope • Kinks • Eve Doesn’t Want More Than 12!

  23. 0 Problems Achieving Efficiency • The Free-Rider Problem • Perfect Price Discrimination • Do people free ride?

  24. Laboratory Experiments and Free-Riding • How a typical experiment works • Typical results

  25. Preference Revelation Mechanisms • ∆TEve = MRTra – (MRSraTotal – MRSraEve) • Eve’s choice: ∆TEve = MRSraEve • Apples Cost $1 • By substitution: MRTra – (MRSraTotal – MRSraEve) = MRSraEve • Add (MRSraTotal – MRSraEve) to both sides: MRTra = MRSraTotal

  26. The Privatization Debate • Privatization • taking services supplied by government and turning them over to the private sector • Should water be provided publicly or privately? • Distributional Issues • Commodity Egalitarianism • notion that some commodities ought to be made available to everyone

  27. The Privatization Debate • Public v Private Considerations: • Relative Input Costs • Wages, etc. • Administrative Costs • Diversity of Tastes

  28. Public versus Private Production • Incomplete Contracts • Airline Security • Market Environment • Competition

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