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Public Goods © 1999, 2007 by Peter Berck.

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Presentation on theme: "Public Goods © 1999, 2007 by Peter Berck."— Presentation transcript:

1 Public Goods © 1999, 2007 by Peter Berck

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

3 Market Doesn’t Work Let P = a – bQ be a typical person’s marginal willingness to pay for the public good. Suppose there are N people Since EACH of the N people consume’s (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 The public good is underprovided by the free market
N( a –bQ) mc a -bQ

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

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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