Transcript impure public good

CHAPTER 4
Public Goods
McGraw-Hill/Irwin
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
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
4-2
Types of Goods
RIVAL
YES
EXCLUDABLE
YES
NO
PRIVATE
GOODS
NATURAL
MONOPOLY
NO
COMMON
RESOURCES
PUBLIC
GOODS
4-3
Noteworthy Aspects of Public Goods

Even though everyone consumes the same
quantity of the good, it need not be valued
equally by all

Examples?
4-4
Noteworthy Aspects of Public Goods

Classification as a public good is not absolute; it
depends on market conditions and the state of
technology

Consider a lighthouse – pure public good
Jamming device preventing ships from obtaining the
lighthouse signal unless special receiver purchased
(excludable)
A scenic view, as congestion rises, nonrivalness criterion no
longer satisfied
 impure public good: is to some extent rival or
excludable


4-5
Noteworthy Aspects of Public Goods

A commodity can satisfy one part of the
definition of a public good but not the other

Main roads in rush house: nonexcludability holds but
consumption is rival. Everyone is trying to get ahead
Exclusion is possible if there are only a few access
roads

4-6
Noteworthy Aspects of Public Goods

Some things that are not conventionally
thought of as commodities have public good
characteristics

Honesty – transactions costs

Fairly distributed income

Information dissemination
4-7
Noteworthy Aspects of Public Goods

Private goods are not necessarily provided exclusively by the
private sector

publicly provided private goods

Medical services
Housing

4-8
Noteworthy Aspects of Public Goods

Public provision of a good does not
necessarily mean that it is also produced by
the public sector

Government can contract out to private firms
for the provision of certain public goods

Garbage collection

Fire protection
4-9
Some Other Public Goods

Basic research

Programs to fight poverty

Uncongested nontoll roads

Fireworks display
4-10
Efficient Provision of Private Goods

Horizontal summation for finding the market
curve Price Adam Eve Market
$11
(DfA)
5
(DfA)
1
(DfA+E)
6
$9
7
3
10
$7
9
5
14
$5
11
7
18
$3
13
9
22
$1
15
11
26
4-11
$
12
11
10
9
Sf
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
4-12
Pareto Efficiency – Private Goods Case







MRSfa = Pf/Pa (from IC and Budget line)
Set Pa = $1
MRSfa = Pf
Price of figs measures the rate at which Adam
is willing to substitute figs for apples
DfA shows MRSfa for Adam
Adams demand curve for figs shows the
maximum price per fig leaf that he would pay
at each level of fig leaf consumption
4-13
DfE shows MRSfa for Eve
Pareto Efficiency – Private Goods Case
Supply (Sf) shows MRTfa
 MRTfa = MCf/ MCa
 Let MCa =1, so MRTfa = MCf
Therefore in pure competition
 Pf = MCf (Pareto Efficient)
 Necessary condition for Pareto efficiency:
MRSfaAdam = MRSfaEve = MRTfa

4-14
Efficient Provision of Public Goods

Are fireworks a public good or private good?

Nonrival? Nonexcludable?
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
4-15

Once again, prices are being interpreted in
terms of MRS as Adam’s willingness to pay
for rockets is his MRS

From production standpoint, price represents
the MRT
4-16

The MB of the fourth unit is the sum of what
Adam and Eve are willing to pay, which is
$250

The MC of the fourth unit is the cost of the
last unit

If the MB>MC then it should be produced

“Provision of public goods should be
expanded until the point at which the sum of
each person’s marginal valuation of the last
unit just equals the MC”
4-17
Market Demand for Public Goods

Public goods must be consumed in equal
amounts, no matter how differently Adam and
Eve value each unit

Market demand is the sum of willingness to
pay by each consumer for a given quantity

So, instead of horizontal summation, it is
vertical summation
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
DfA shows MRSfa for Adam
DfE shows MRSfa for Eve
Sf shows MRTfa
Necessary condition for Pareto efficiency:
MRSfaAdam + MRSfaEve = MRTfa
4-20

Private Good:

MRS (Adam)= MRS(Eve) = MRT

Public Good

MRS (Adam) + MRS(Eve) = MRT

Since everyone consumes the same amount of
public good, its efficient provision requires
that the total valuation they place on the last
unit provided (sum of MRS) equal the
incremental cost to society of providing it
(MRT)
4-21
Problems Achieving Efficiency

No incentive to lie about how much you value
a private good!

The Free-Rider Problem
Someone who lets other people pay while
enjoying the benefits himself

Excludable consumption, but nonrival
Eg. Fireworks display cannot be seen w/o
purchasing a ticket. Anyone willing to pay
more than 0 can buy ticket. What should you
charge?
4-22

Solutions to the free-rider problem

Perfect price discrimination
A nonrival excludable commodity can be provided
privately in case of perfect information

Policy Perspective: Global Positioning
System (US military initially did not want
civilians to benefit from GPS)

Do people free ride?
4-23
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” feeling of satisfaction from giving
giving
4-24
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
4-25
Public versus Private Production







Efficiency of private production
Problems in comparing cost differences
Incomplete Contracts
Competition to supply good or service
Reputation building
Policy Perspective: Should airport security be
produced publicly or privately?
Market Environment
4-26
Distributional Issues

Commodity egalitarianism – notion that some
commodities ought to be made available to
everyone
4-27
Appendix: Preference Revelation
Mechanisms

∆TEve = MRTra – (MRSraTotal – MRSraEve)

Eve’s choice: ∆TEve = MRSraEve

By substitution:
MRTra – (MRSraTotal – MRSraEve) = MRSraEve

Add (MRSraTotal – MRSraEve) to both sides:
MRTra = MRSraTotal
4-28