Public Goods

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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 persons 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
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Figure 4.1 Marginal Costs of Consuming and
Producing a Pure Public Good--Figure B
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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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Figure 4.2 A Congestible Public Good
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Figure 4.3 Classifying Goods According to the
Degree of Rivalry and Excludability of Benefits
from Their Use
1
Excludability
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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Figure 4.4 Demand For a Private Good
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Figure 4.5 Demand For A Pure Public Good
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Figure 4.6 Efficient Output for a Pure Public Good
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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
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 Its 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.