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.
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.
Public Goods can be made private
TV signals scrambled or blocked
Property rights assigned
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.
Figure Marginal Costs of Consuming and Producing a Pure Public Good-Figure A
0
Cost (Dollars)
Number of Consumers
200
Marginal Cost of Allowing an
Additional Person to Consume a
Given Quantity of Pure Public Good
1
Figure Marginal Costs of Consuming and Producing a Pure Public Good--Figure B
Marginal Cost of Producing
a Pure Public Good
MC = AC
200
Units of a Pure Public Good per Year
Cost (Dollars)
0
Price Excludable Public Goods
Club goods
Another type of good is a price-excludable public good: no rivalry but exclusion is easy.
Examples: Country Clubs, Cable TV
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
Figure A Congestible Public Good
Number of Consumers per Hour
0
Marginal Cost
1
Marginal Cost per User
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
“socializing ” function
teaches the importance of following rules, obeying orders, and working together
developing human capital to increase productivity as workers
helps students identify their abilities and choose appropriate occupations, thereby increasing productivity levels for a nation.
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.
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.
Figure Demand For a Private Good
Price per Loaf of Bread (Dollars)
Loaves of Bread Purchased per Week
7
6
5
4
3
2
1
0
1
2
3
4
5
9
10
6
8
7
E
DC = MBC
DB = MBA
DA = MBA
D = QD
Figure Demand For A Pure Public Good
Security Guards per Week
100
200
300
400
500
600
700
800
Marginal Benefit (Dollars)
0
1
2
3
4
5
DA = MBA
DB = MBB
DC = MBC
Z 1
Z 2
Z 3
Z4
D= MBA
Figure Efficient Output for a Pure Public Good
Security Guards per Week
100
200
300
400
500
600
700
800
Marginal Benefit (Dollars)
0
1
2
3
4
5
MBA
MBB
MBC
D= MBi = MSB
E
MC = AC = MSB
Efficient Output of a
Pure Public Good
The socially optimal level of the public good (as for any good) requires that we set the Marginal Social Benefit of that good equal to its Marginal Social Cost
MSB = ∑MBj = MSC
Lindahl Pricing: Everyone in the group cooperates and participants each pay their marginal benefit.
$300
$450
$600
$750
MB
$50
$100
$150
$200
MBC
$100
$150
$200
$250
MBB
$150
$200
$250
$300
MBA
4
3
2
1
Number of Security Guards per Week
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).
A Numerical Example
Lindahl Equilibrium
The amount each person contributes depends on individual valuation for the public good.
The sum of the contributions equals the total cost of the public good.
Allocative efficiency only requires #2. Lindahl Eq. is equity issue to equate net benefits per person (rather than equate tax share per person)
Free riding
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.
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.
Fallacy of Composition
Mutual free-riding can lead to underprovision (or no provision) of public good
Prisoner’s Dilemma effect
Prisoner’s Dilemma
MSC=10
MPB=8
MSB=16
Transaction costs
MSC=18
0,0
8,-2
-2,8
3,3
0,0
8,-2
-2,8
-1,-1
Patty
Patty
Selma
Selma
contribute
free ride
contribute
free ride
cont
f r
cont
f r
Chicken (Exploitation) Game
MSC=10
MPB=12
No dominant strategy
Multiple equilibria
0,0
12,2
2,12
7,7
Patty
Selma
contribute
free ride
contribute
free ride
Selective Incentives
Clubs attract members by offering private goods
Clubs compete based on benefits and costs
Clubs can also provide benefits to nonmembers but need to have private membership goods to overcome free riding
When these clubs are government jurisdictions, membership based on address
“voting with the feet” (Tiebout)
Club membership can be coercive
Government competition reduces coercive aspect
Rent Seeking
Competition can be socially wasteful use of resources in aggregate
Resources used (advertising, lobbying etc) to redistribute membership not increase or improve services
Example: Super Bowl
Compare versus fixed rule (championship series), fixed location (Augusta, Wimbledon etc) or pure lottery system
