Transcript Slide 1
CHAPTER 4 Public Goods McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved. Activity Pull out a Piece of Paper 4-2 Activity - Stand Up Government Should: Keep Roads Safe Build Roads Require Liability Insurance Proper Noise Volume Seatbelt 4-3 Activity - Stand Up Government Should Provide Health Insurance for: Children Elderly War Veterans The Poor Everybody 4-4 Activity - Freewrite 5 Minutes of Free Writing What should the government provide? Consider your thoughts on: Infrastructure Education Health Care Defense Income Distribution Savings 4-5 Definitions Excludable preventing anyone from consuming the good is relatively easy Nonexcludable preventing anyone from consuming the good is either very expensive or impossible 4-6 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 4-7 Types of Goods RIVAL YES EXCLUDABLE YES NO PRIVATE GOODS NATURAL MONOPOLY NO COMMON RESOURCES PUBLIC GOODS 4-8 Impure Public Goods a good that is rival and/or excludable to some extent Park Popularity and Location 4-9 Pure Public Goods Everyone Consumes the Same Missile Defense Everyone Does Not Value the Same Technology 4-10 Some Other Public Goods Fireworks Display Safety Ratings Basic Research Programs to Fight Poverty/Income Distribution Satisfaction is Consumed Uncongested Nontoll Roads 4-11 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 4-12 Publicly Provided Private Goods Rival and excludable commodities that are provided by governments Public Housing 4-13 Efficient Provision of Private Goods Price $11 Adam (DfA) 5 Eve (DfA) 1 $9 7 3 $7 9 5 $5 11 7 $3 13 9 $1 15 11 4-14 $ 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 4-15 Pareto Efficiency – Private Goods Case MRSfa = Pf/Pa Set Pa = $1 MRSfa = Pf Df => MRSfa 4-16 Pareto Efficiency – Private Goods Case MRTfa = MCf/MCa MCf/MCa = Pf/Pa What gives us this result? Sf shows MRTfa MRSfaAdam = MRSfaEve = MRTfa 4-17 Efficient Provision of Public Goods Units of Fireworks 1 2 3 4 Adam (DrA) $300 $250 $200 $150 Eve (DfE) 250 200 150 100 4-18 $ 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 Fireworks4-19 Pareto Efficiency – Public Goods Case MRSfa = Pf/Pa Set Pa = $1 MRSfa = Pf Df Shows MRSfa Sf Shows MRTfa Pareto efficiency: MRSfaAdam + MRSfaEve = MRTfa 4-20 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? Price $11 Adam (DfA) 5 Eve (DfA) 1 $9 7 3 $7 9 5 $5 11 7 $3 13 9 $1 15 11 4-21 Drawing Social Demand Steeper Slope Kinks Eve Doesn’t Want More Than 12! 4-22 Problems Achieving Efficiency The Free-Rider Problem Perfect Price Discrimination Do people free ride? 4-23 Laboratory Experiments and Free-Riding How a typical experiment works Typical results 4-24 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 4-25 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 4-26 The Privatization Debate Public v Private Considerations: Relative Input Costs Wages, etc. Administrative Costs Diversity of Tastes 4-27 Public versus Private Production Incomplete Contracts Airline Security Market Environment Competition 4-28