Public Goods

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Section 3
Public Goods
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Definition

• The definition of a Pure Pubic Good is as
  follows
• Consumption is non-rival meaning that once a
  good is provided, there is no additional cost for
  another person to consume it.
• Consumption is non-excludable preventing anyone
  else from consuming the good is either impossible
  or cost prohibitive (too expensive).

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Definition

• Private Goods, by comparison, are rival and
  excludable, like a can of coke, or pizza.
• Public Goods are goods that would not be provided
  efficiently in a free market system because firms
  would not be able to adequately charge for them.
  

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The Pure Public Good

• is one in which all enjoy in common in the
  sense that each individuals consumption of a
  such a good leads to no subtraction from any
  other individuals consumption of that good.
  (Samuelson)

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Examples of Pure Public Private Goods!!
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Public Good Example

• Street Lights!

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Two Types of Economic Goods

• The distinction between a Private and Public Good
  has nothing to do with whether or not the
  government produces the commodity.
• Nor does the label Private or Public tell us
  anything about which sector provides it.
• The distinction involves the relationship between
  consumption and how much of a good gets used
  up.

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Comments on Public Goods

• It is difficult to find a Pure Public Good.
• The degree to which a good is purely public
  depends on to what degree it is non-rival and to
  what degree it is non-excludable.

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Comments on Public Goods

• Some goods or commodities may only satisfy one
  part of the Public Good definition.
• Non-excludability and non-rivalry do not have to
  go together.

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Comments on Public Goods

• A number of things not typically considered a
  commodity have Public Good characteristics.

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Comments on Public Goods

• Private Goods are not exclusive to the private
  sector.
• There are many public provided private goods
  (rival commodities).
• Conversely, public goods are sometimes provided
  by the private sector.

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Comments on Public Goods

• The public provision of a good does not mean it
  is always produced by the public sector.
• Garbage collection in some cities is one such
  example.

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Questions on the Definition of a Public Good?
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Provision of Private Goods

• When considering the provision of a Private Good,
  such as steak, we know that the condition for the
  optimal level of provision is that the marginal
  willingness to pay should be equal to the
  marginal cost of the unit.
• If the willingness to pay for the last unit being
  supplied (marginal benefit) exceeds the cost of
  obtaining that unit (marginal cost), then it
  would be worthwhile to expand output.

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Provision of Private Goods

• To find the market demand schedule for the
  private good, the individual households demands
  are summed horizontally.
• The Demands expressed by individuals for Private
  Goods must be summed horizontally to represent
  the fact that each unit is consumed in use.

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Provision of Private Goods

• Optimal Provision of a
• Private Good Example!

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Provision of Public Goods

• A pure public good has the feature that, if one
  unit is made available to one household, then it
  is available in undiminished amounts to every
  other household in society.
• The Demands expressed by individuals for Public
  Goods must be summed vertically because any
  particular unit is simultaneously available to a
  number of consumers it is not consumed in
  use.

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Efficient Provision of a Public Good

• MBAdam MBEve MC
• the public good should be provided up to the
  point where the sum of the marginal benefits of
  all of the individuals in the society equal the
  marginal cost of producing another unit of the
  public good.

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Provision of Public Goods
Optimal Provision of a Public Good Example!
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Provision of Public Goods

• In dealing with the Public Good problem, we are
  always faced with a choice among different
  imperfect ways of solving the challenge of how to
  produce an efficient amount.

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Private Provision of Public Goods

• Essentially, the private provision of a public
  good can and does happen, but it will not be an
  efficient allocation of resources (under a pure
  public good condition).

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Private Provision of Public Goods

• When a private good is exchanged in a competitive
  market, an individual has no incentive to lie
  about how much he or she values it.
• For non-excludable public goods, however, people
  may have incentives to hide their true
  preferences.

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Private Provision of Public Goods

• Where there are public goods, any one person
  can hope to snatch some selfish benefit in a way
  not possible under the self-policing competitive
  pricing of private goods. (Samuelson, 1955).
• Hence, the private market is likely to fall short
  of providing an efficient allocation of a public
  good.

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The Free Rider Problem

• The incentive to let other people pay while you
  enjoy the benefits is know as the free-rider
  problem.
• Studies have found that, on average, people do
  contribute a portion of their resources to the
  provision of a public good, but that some
  free-riding is present in the sense that
  subjects fail to contribute equal to their
  benefit.

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Any Questions?