Transcript Why is public goods?

Chapter 4
Public Goods
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Why is public goods?
How different of public and private goods?
What is important characteristics of public goods?
Who benefit from public goods?
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In Em, M. sc. in Economics
Learning objectives
 Characteristics of Public Goods
 Pure Public Goods and Pure Private Goods
 Marginal Costs for Provision of Public Goods
 Provision of Private Good and Public Goods: Markets
and Government
 Demand For a Pure Public Good
 Efficient Output of a Pure Public Good
 Summary of the chapter
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Public Goods
 Public Goods are goods for which exclusion is
impossible.
 One example is National Defense: A
military that defends one citizen from
invasion does so for the entire public.
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Characteristics of Public Goods
 Nonexclusion: The inability of a seller to prevent
people from consuming a good if they do not pay
for it.
 Nonrivalry: The characteristic that if one person
“consumes” a good, another person’s pleasure is
not diminished, nor is another person prevented
from consuming it.
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Pure Public Goods & Pure Private Goods
 Pure Public Good: No ability to exclude and no rivalry
for benefits.
 Pure Private Good: Clear ability to exclude and rivalry
for benefits.
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Marginal Costs for Provision of Public Goods
 The marginal cost of allowing another person to
benefit from a pure public good is zero, while the
marginal cost of providing a greater level of public
good is positive.
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Figure 4.1 Marginal Costs of Consuming and
Producing a Pure Public Good-Figure A
Cost (Dollars)
200
Marginal Cost of Allowing an
Additional Person to Consume a
Given Quantity of Pure Public Good
0
7
1
Number of Consumers
Figure 4.1 Marginal Costs of Consuming and
Producing a Pure Public Good--Figure B
Cost (Dollars)
Marginal Cost of Producing
a Pure Public Good
200
MC = AC
0 Units of a Pure Public Good per Year
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Example: Bread versus Heat
 Bread – Clearly a pure private good because there is
the ability to exclude and there is rivalry to consume.
 Heat – Clearly a pure public good because there is no
ability to exclude and there is no rivalry to consume.
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Provision of Private Good and Public
Goods: Markets and Government
 Price Excludable Public Goods
versus
 Congestible Public Goods
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Price Excludable Public Goods
Excludability, but no rivalry
 Another type of good is a price-excludable public
good: no rivalry but exclusion is easy.
Examples: Country Clubs, Cable TV
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Congestible Public Goods
Rivalry but no excludability
 There are public goods where, after a point, the
enjoyment received by the consumer is diminished by
crowding or congestion. These are called Congestible
Public Goods.
 Examples: roads and parks
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Marginal Cost
Figure 4.2 A Congestible Public Good
Marginal Cost per User
0
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1
Number of Consumers per Hour
Figure 4.3 Classifying Goods According to the Degree of
Rivalry and Excludability of Benefits from Their Use
A
1
C
H
B
0
1
Rivalry
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Education as a Public Good
 Education is a service that has some characteristics of a
public good and some characteristics of a private good.
 External benefits
 It helps us live in a civil society.
 It has a “socializing ” function.
 It teaches the importance of following rules, obeying orders, and
working together.
 It provides students with basic skills like punctuality and the ability
to follow directions that increase their productivity as workers.
 It helps students identify their abilities and choose appropriate
occupations, thereby increasing productivity levels for a nation.
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Education as a Private Good
 Education has characteristics of a private good.
 Wide disparities exist in the quantity and quality of
education provided among school districts.
 The level of support that parents can give students at
home increases with income and home support is an
important factor in learning for children.
 There is no way to prevent parents who want more than a
standardized quantity and quality of education for their
children from buying it in the marketplace.
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Demand For a Pure Public Good
 Market demand for a Pure Private Good is derived by
adding quantities demanded at each price.
 Demand for a Pure Public Good is derived by adding
how much people will be willing to pay at each
quantity.
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Price per Loaf of Bread (Dollars)
Figure 4.4 Demand For a Private Good
7
6
5
4
E
3
2
S = MC = AC
D = QD
DC = MBC
DB = MBA
DA = MBA
1
0
1
2
3
4
5
6
7
8
9
Loaves of Bread Purchased per Week
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Marginal Benefit (Dollars)
Figure 4.5 Demand For A Pure Public Good
800
700
600
500
400
300
200
100
0
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Z1
Z2
Z3
Z4
D= MBA
DA = MBA
DB = MBB
DC = MBC
1
2
3
4
5
Security Guards per Week
Marginal Benefit (Dollars)
Figure 4.6 Efficient Output for a Pure Public Good
800
700
600
500
400
300
200
100
0
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E
MC = AC = MSB
D= MBi = MSB
MBA
MBB
MBC
1
2
3
4
5
Security Guards per Week
Efficient Output of a Pure Public Good
 The socially optimal level of the public good requires
that we set the Marginal Social Benefit of that good
equal to its Marginal Social Cost. MSB = MSC
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
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Lindahl Pricing: Everyone in a group cooperates and
participants each pay their marginal benefit.
 We can demonstrate this issue mathematically,
numerically (using a table), and graphically.
Mathematically: Lindahl Pricing
 Recall from Figure 4.5 that the marginal social benefit
for a pure public good is the sum of the individual
marginal benefits.
 That is:
MSB = MB.
 Efficient output is therefore:
MSB = MB = MSC.
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Numerically: Lindahl Pricing
 Suppose we have three people who are
discussing the issue of hiring security guards.
Note that each person places a different value on
the levels of security.
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A Numerical Example
Number of Security Guards per Week
1
2
3
4
MBA
$300
$250
$200
$150
MBB
$250
$200
$150
$100
MBC
$200
$150
$100
$50
MB
$750
$600
$450
$300
• If the cost of security guards is $450 per week, then no
individual will hire even one guard, even though to the group
one guard is worth $750. The group should hire three.
• If they each pay their marginal benefit, then three guards are hired.
Person A pays $600 ($200 per guard), person B pays $450 ($150
per guard) and person C pay $300 ($100 per guard).
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Lindahl Equilibrium
 The amount each person contributes, ti, depends on
individual desires for the public good.
 The sum of the contributions equals the total cost
of the public good.
 StiQ* = MC(Q*) = AC(Q*)
 Sti = MC = AC
 All individuals agree to pay their shares.
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Freeriding
 Freeriding occurs when people are not
honest in stating their Marginal Benefit,
because if they understate it, they can get a
slightly reduced level of the public good
while paying nothing for it.
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Freeriding is easier with
 Anonymity: If everyone knows who contributes,
there can be powerful social stigmas applied to
shirkers.
 Large numbers of people: It’s easier to determine
the shirkers in a small group and the punishment is
more profound when people close to you shun you
for not paying your share.
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Illustrating Voluntary Contributions to a
Public Good: The Gulf War
 Under the premise that defeating Iraq in the Gulf
War in 1990 was a public good to be consumed by
the industrialized economies and Arab nations,
each nation was expected to contribute.
 The U.S. and UK contributed the bulk of the
fighting forces.
 Saudi Arabia, Kuwait, the UAE, Japan, and
Germany voluntarily paid $54 billion of the
estimated $61 billion cost.
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National Defense & Homeland Security
National defense is a classic example of a public good.
 Defense
 From 1968 to 1978, defense spending fell from 9% of GDP to 5%
 Between 1978 and 1986, it increased to 6.3%.
 By 1999, it had fallen to less than 4%.
 In 2002, it was 4.5%.
 Homeland Security
 The new department merged several agencies from the
departments of Justice, Transportation, Treasury, Agriculture,
Energy, Health and Human Services, and Commerce.
 The Homeland Security Department could ultimately have
170,000 employees working in border and transportation
security, emergency preparedness and response, biological
warfare defense, and computer security. It will also house
the Secret Service and Coast Guard.
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Summary of the chapter
 Characteristics of Public Goods
 Pure Public Goods and Pure Private Goods
 Marginal Costs for Provision of Public Goods
 Provision of Private Good and Public Goods: Markets
and Government
 Demand For a Pure Public Good
 Efficient Output of a Pure Public Good
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End of Chapter 4
Thank you!
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In Em, M. sc. in Economics