Transcript bYTEBoss ch04

Chapter 4
Public Goods
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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 and
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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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
1
Number of Consumers
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Figure 4.1 Marginal Costs of Consuming and
Producing a Pure Public Good--Figure B
Marginal Cost of Producing
a Pure Public Good
MC = AC
Cost (Dollars)
200
0 Units of a Pure Public Good per Year
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Price Excludable Public Goods

Price-excludable public good: there are
external benefits when produced or
consumed but exclusion is easy.
Examples: Country Clubs, Cable TV
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Congestible Public Goods

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
1
Number of Consumers per Hour
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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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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
S = MC = AC
D = QD
DC = MBC
DB = MBA
DA = MBA
2
1
0
1
2
3
4
5
6
7
8
9
10
Loaves of Bread Purchased per Week
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Marginal Benefit (Dollars)
Figure 4.5 Demand For A Pure Public Good
800
Z1
700
600
500
400
300
200
100
0
Z2
Z3
Z4
D= MBA
DA = MBA
DB = MBB
DC = MBC
1
2
3
4
5
Security Guards per Week
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Marginal Benefit (Dollars)
Figure 4.6 Efficient Output for a Pure Public Good
800
700
600
500
E
MC = AC = MSB
400
300
200
100
0
D= MBi = MSB
MBA
MBB
MBC
1
2
3
4
5
Security Guards per Week
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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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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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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.



tiQ* = MC(Q*) = AC(Q*)
ti = 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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