Transcript impure public good

CHAPTER 4
Public Goods
McGraw-Hill/Irwin
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
Public Goods

“There exists an intrinsic connection between
the common good on the hand and the
structure and the function of public authority
on the other.”

“The moral order, which needs public
authority in order to promote the common
good in human society, requires also that the
authority be effective in attaining that end.”
Pope John XXIII
4-2
Public Goods

Which goods and services should the public
sector provide?

Which services that are currently provided by
the government should be privatized?

These issues are in the heart of public policy
and public finance.
4-3
Goods

Army

Pizza

Education

Health

Etc…
4-4
Public Goods

National Defense is an example of a pure
public good, defined as fellows:

Once it is provided, the additional resource
cost of another person consuming the good is
zero – consumption is non-rival.

To prevent anyone from consuming the good
is either very expensive or impossible –
consumption is non-excludable.
4-5
Private Goods

In contrast private good like pizza is rival and
excludable.
4-6
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.
4-7
Types of Goods
RIVAL
YES
EXCLUDABLE
YES
NO
PRIVATE
GOODS
NATURAL
MONOPOLY
NO
COMMON
RESOURCES
PUBLIC
GOODS
4-8
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
4-9
Some Other Public Goods

Basic research

Programs to fight poverty

Uncongested nontoll roads

Fireworks display
4-10
Efficient Provision

Efficient provision of public good requires
that the sum of individual MRSs equal the
MRT, unlike the private goods where each
MRS equals the MRT.

Market mechanisms are unlikely to provide
non-rival goods efficiently, even if they are
excludable.
4-11
Horizontal and Vertical Summation


Horizontal Summation: Finding the market
demand at an given price involves summing
the horizontal distance between each of the
private demand curves and the vertical axis at
the price.
For a public good, the group willingness to
pay is found by the vertical summation of the
individual demand curve.
4-12
Efficient Provision of Private Goods
Price
Adam
(DfA)
Demand for
Fig Leave
Eve
(DfA)
Market
(DfA+E)
Demand for
Fig Leave
Horizontal
Summation
$11
5
1
6
$9
7
3
10
$7
9
5
14
$5
11
7
18
$3
13
9
22
$1
15
11
26
4-13
$
12
11
10
Sf
9
8
7
6
5
4
3
DfA+E
2
1
DfE
0
0
1
2
3
4
5
6
7
8
DfA
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26
Quantity of Pizza
4-14
Pareto Efficiency – Private Goods Case


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
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

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
4-15
Efficient Provision of Public Goods
Units of Fireworks
1
2
3
4
Adam (DrA)
$300
$250
$200
$150
Eve (DfE)
Market
(DfA+E)
250
$550
200
$450
150
$350
100
$250
4-16
$
800
750
700
650
600
550
500
450
Sr
400
350
300
250
200
150
DrA+E
DrA
100
50
0
DrE
1
2
3
4
Quantity of Fireworks4-17
Pareto Efficiency – Public Goods Case

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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
4-18
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?
Compare US and Palestine.
4-19
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
4-20
The Privatization Debate

Public goods can be provided privately, and
private goods can be provided publicly.

Even in cases where public provision of a
good is selected, a choice between public and
private production must be made.
4-21
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
4-22
Distributional Issues

Commodity egalitarianism – notion that some
commodities ought to be made available to
everyone.

Example: Provision of Medical Care in USA.

Example: Provision of Social Welfare in
Palestine.
4-23
Public versus Private Production

A key factor in determining whether public or
private production depends on:
1.
Efficiency of private production
2.
Problems in comparing cost differences
3.
Incomplete Contracts
4.
Competition to supply good or service
5.
Reputation building
6.
Policy Perspective: Should airport security be produced
publicly or privately?
7.
Market Environment
4-24
Education: Public or Private?

Discussion.
4-25