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Public Goods © 1999, 2007 by Peter Berck. Definition A good is a pure public good if one persons consumption of the good does not diminish another persons.

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Presentation on theme: "Public Goods © 1999, 2007 by Peter Berck. Definition A good is a pure public good if one persons consumption of the good does not diminish another persons."— Presentation transcript:

1 Public Goods © 1999, 2007 by Peter Berck

2 Definition A good is a pure public good if one persons consumption of the good does not diminish another persons consumption of the good. Examples: National defense, TV Programs, Clean Air, Views, Existence of Wild Creatures

3 Market Doesnt Work Let P = a – bQ be a typical persons marginal willingness to pay for the public good. Suppose there are N people Since EACH of the N people consumes (enjoys? loathes?) Q Total marginal willingness is N P = N (a- bQ)

4 Social Welfare Max Demand=Total Marginal Willingness= N P = N (a- bQ) So Social optimum mc(Q) = NP = N (a-bQ) or a – bQ = mc(Q) / N in social optimum each person should bear only 1/N of marginal cost

5 Market Outcome No person will buy any more Q when P = a –b Q = mc(Q)

6 The Picture mc N( a –bQ) a -bQ The public good is underprovided by the free market

7 DWL mc N( a –bQ) a -bQ Triangle is DWL. Area under N(a-bQ) is lost willingness. Area under mc avoided cost.

8 Conclusion Although the Market will properly allocate private goods, like candy bars It will not provide a outcome with public goods that Maximizes surplus plus profits

9 Therefore With Public Goods, the government is needed to either produce them or stop them from being destroyed It can accomplish these aims with Command and Control (standards) or Incentives (taxes)

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