Chapter 4: public goods

1. Chapter 4: public goods

2. Public provision of goods • Private provision of certain goods (particularly those that are non-excludable and non-rival in consumption) may fail to produce the efficient level of the good/service because of the incentives to under-contribute or “free ride”. • Why would a person voluntarily contribute to the provision of a public good when he/she can enjoy the benefits without such contribution? • Conventional economic models suggests:___________________ • More recently, experimental studies show that contributions are often positive, and not zero. • However, an under-provision of the good still results. • Experimental studies find:

3. Problems: efficient provision of public goods • How does a government collect demand information on a good/service in cases where no private market exists (such as national defense) to know how much of the service is optimal? •  perhaps demand information could be elicited from citizens via survey instruments? • Would consumers accurately supply such information? • How much, in monetary terms, do you value national defense?

4. Problems continued 3. __________________________________ If efficient provision of public goods depends on supplying a good such that MRSa + MRSb = MRT then consumers must reveal their true WTP or preferences to arrive at the optimal provision level. • Note: this is not a problem with private goods since you either pay the market price and receive the good and/or gain access to a service; or you fail to pay and do not receive the good/service (since private goods are excludable). • With public goods there is an incentive to:

5. Problems continued 4. • requires adoption of some social welfare function • This area of economics is referred to as “political economy” or how the government go about making decisions about the appropriate level of provision. 5. _______________________________: If true preferences could be identified, and appropriate contributions determined then the government would need some way of forcing contributions (typically taxes) . • In general, taxation distorts prices and therefore economic incentives and behavior. They typical result in some degree of efficiency loss. Therefore, a “ first best solution” is not practical. • Taxation will be discussed in the 3rd section of the course.

6. Real world examples—Public goods • Public broadcasts, such as radio stations, are public goods by nature. They are non-rival and non-excludable and therefore face problems with insufficient contributions to fund the optimal level of programming. • WNYC, New York City radio station, estimates that they have 1 million listeners and only 75,000 contribute each year (7.5% of listeners). • Contributions account for 35% of operating budget. • Obvious free riding occurs here! • To avoid this same problem the BBC (national TV station in UK) charges a $200 annual licensing fee to anyone who owns and operates a TV. • Enforcement? They maintain a database of addresses recorded when TV purchases are made and use TV detection devices to sense if a TV is being used. If no license, fee of up to $1,500!

7. “Free-riding” literally • 1994, the town of Cambridge tried to provide a green alternative to the dirtier forms of transit—cars, buses, and trains. • Cambridge spent $20,000 on 350 green bicycles scattered throughout the city. • Anyone could use the bicycle free of charge throughout the day, reducing reliance on other modes of transportation (non-excludable). • Users were expected to return bikes to one of 15 stands after use at the end of the day. • Within 4 days, not a single bicycle could be found. Presumably the bikes were taken, painted another color, and used privately or sold for cash. The green experiment failed! • Why? Because the “good” in question had intrinsic value that could be captured by an individual. The good was not truly “ public” in nature and “entrepreneurs” recognized the opportunity to maximize their private wealth and didn’t care about social welfare. • Literally “free riders!”

8. Under what conditions is the private provision of a public good close to the efficient level? 1. • Ex: a driveway shared by two homes—a mansion and a shack. If one removes snow from driveway then both get the benefits (non-excludable). The mansion owner, with more money, may care enough to pay for the entire cost to have a clean driveway. 2. •  contributing to the public good because it enhances your welfare and the welfare of others; not simply maximizing your personal utility. • Contributions are typically higher when:__________________________

9. Conditions continued 3. • This can be as simple as you feeling a psychological benefit from doing the right thing • Often associated with public acknowledgment of your contribution. • For example, we observe higher contributions when a plaque with names of supporters is displayed.

10. The privatization debate • Are there situations in which public goods are provided successfully by the private sector? • Yes, such examples include: • Such examples provide evidence that government intervention is not always the solution giving weight to privatization:

11. Privatization examples 1. Our court system has a private counterpart— 2. _______________________________________: • Ex: many BIDs occur in urban areas where sanitation (garbage collection, street sweeping, etc) are provided by the local government. However, due to budget constraints services are not provided at a sufficient level. The business owners pay a private firm to provide these services. • They often result in _______________________________(as merchants move out of downtown areas and out to suburbs; BIDs address issues of crime, safety, cleanliness of these areas to attract retail back)

12. BIDs continued • One of the first examples was NYC—Times Square. Local government tried for years to keep area clean and crime free to no avail. In 1992, a BID was formed hiring own sanitation workers, private security, etc. • In theory, BIDs should fail due to: • Many local communities, in an effort to minimize the free rider problem_________________________________________________ • example, in NYC if 60% of the merchants voluntarily participate in BID, then taxes can be levied on all merchants in the BID area to force contributions. • In the case of Times Square, 84% voluntarily contributed resulting in a BID with a budget of over $5 million and 120 employees.

13. Privatization examples continued 3. From text: Hurricane Katrina destroyed a government owned (car) bridge and a privately owned train bridge. • with six months, the privately owned train bridge was fully reconstructed and open for business. • within sixteen months, the government bridge was still under construction (only basic pilings –support structure—was completed).