Transcript Public Goods

CHAPTER
5
Public Goods
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
Public Goods
Many definitions in use
 Focus on characteristics that might cause
resources to be misallocated
 Not just public provision
 One of two characteristics:

 Collective
Consumption
 Nonexcludability
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Collective Consumption Goods
Consumption by one consumer will not
reduce the consumption of any other
consumer
 MC = 0
 Example: radio broadcast signal

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The Argument for Public
Sector Production
At efficient output level P=MC
 MC = 0 for collective consumption good
 For efficiency, P = 0
 Private sector will not produce efficient
level of output
 Solution: Government production at zero
price

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
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The Argument for Private
Sector Production
Lack of congestion might be because of
past overproduction
 Private production provides a revealed
price mechanism
 Public production is financed through
taxation

 Benefits
of production vs. excess burden
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Congestion of Collective
Consumption Goods
Collective consumption goods can
become congested
 Collective consumption is an economic
concept, not technological
 Cannot evaluate based on good’s
characteristics
 Example: swimming pool

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The Optimal Output of a
Collective Consumption Good

Private consumption goods
 Market
demand determined by horizontally
summing individual demand curves

Collective consumption goods
 Market
demand determined by vertically
summing individual demand curves
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The Optimal Output of a
Collective Consumption Good
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Lindahl Pricing
Set so each individual pays a marginal
price equal to the marginal benefit that
individual receives
 Not necessary for the efficient level of
output

 Individuals
cannot adjust individual quantity
consumed
 Price does not have to equal consumer’s
marginal valuation to be efficient
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Lindahl Pricing
Advantage: everyone prefers same level
of output
 Increases likelihood that efficient level of
output is chosen
 Practicality?

 Earmarked
gasoline taxes
 Financing public education through property
taxation
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
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Pure and Impure Collective
Consumption Goods
If each consumer’s consumption share is a
function of total output, optimality
condition holds regardless whether public
or private good
 Anytime consumer cannot quantity
adjusted, optimality condition holds
 Example: public education

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
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Nonexcludability
Once produced, it is difficult to keep
people from consuming the good
 Unrelated to collective consumption
 Does not have to be publicly provided
 Example: National defense

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Nonexcludability as a
Prisoner’s Dilemma
Free riding
 Incentive to benefit from the good
without contributing to production
 Self-interest = everyone free rides
 Inability to cooperate leads to prisoner’s
dilemma

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Nonexcludability as a
Prisoner’s Dilemma
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Nonexcludability and Collective
Consumption in Public Goods
Public goods embody two characteristics
 Only one is needed to be a public good
 Some have elements of both
 Pure private good

 Excludable,

private in consumption
Pure public good
 Nonexcludable,
collective consumption
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Nonexcludability and Collective
Consumption in Public Goods

Pure private good
 Excludable,

private in consumption
Pure public good
 Nonexcludable,
collective consumption
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
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Nonexcludability and Collective
Consumption in Public Goods
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Public Policy Towards Public
Goods
Public goods do not have to be produced
publicly
 Examples:

 Microcomputer
software
 Television
 Radio
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