2 4.1. Public Goods vs Private Goods Consumption properties ofgoods(Pure) Public goodsNon-RivalryNon-Excludable LighthousePrivate goods:RivalryExcludableImpure Public Goods:Non-rival, but excludable Toll roadImpure Public Goods:Non-excludable, but rival Common fishing ground
3 4.2. Public Goods and Market Failure The Case of Pay TVNon-rival:MC=0 P=0Consume until MU = 0But, excludable:P > 0Consume before MU = 0When goods withnon-rival in consumptionis charged P > 0 under-consumptionIf charged P = 0,none will supplythe goodsundersupplyThus, two basic forms ofmarket failure associatedwith public goods, i.e.Under-consumptionUnder-supply
4 4.3. Fact about Provision of Public Goods Production of public goods notalways by the government, but manypublic goods produced by private sector.Example Toll provided by private sector User fee
6 Collective Demand for Public Goods Vertical (not horizontal) summation ofindividual demandP = Pa + PbTaxPricePrice, P = Pa +PbQuantity Q=QA =QBCollective DPDemandof APbPaDemandof BGeQuantity of PublicGoods
7 Efficient Provision of Public Goods: Lindahl EquilibriumDerive “Collective” demandcurve Simply by askingWTP of individualsCollective Demandby A and BTax PriceSupplyTax PriceDemandby AEfficientProductionPa+ Pb = PPaGeGTax PriceGeGParetoefficiency,since MC = MBBut, dishonestyabout WTP?Demandby BPbGGe
8 Users are directly charged fairer Less consumed Paying for Public Goods: User FeesUser Fees if exclusion possibleUsers are directly charged fairerLess consumedUnder-consumptionBridge Use paid by User FeeToll FeeDemandBridgeCapacityPP >0QmQcQeNumber of Trips
9 Paying for Public Goods: Public Tax Public tax if exclusion not possibleUsers are not directly charged, but taxpayersSo, users P = 0Over-consumedOver-consumptionBridge Use paid by TaxpayersToll FeeDemandBridgeCapacityPQmQcP = 0Qe =Number of Trips
10 The Government’s Mechanism to Overcome Free Rider ProblemNon-Excludability Free ride strategy by usersFinancing public provision of the goods by the governmentindividual users must be forced to support throughuser fee E.g. Airport tax
12 Free Rider ProblemCan private sector control free ride problem , at least partially?Under-provision of public goods by private sectorIt is more likely if there are individual with high income or high demand for the public goods, individuals who are altruistic , or individuals who derive a “warm glow” from their contribution
13 4.6. Problems Faced by Public Provision of Public Goods Crowding out of private provisionAs the government provide more public goods, the private sector will provide lessDetermining costs and benefits of public goods(See Benefit-cost analysis in chapter 7 on this issue)Reflecting the public’s demand for public goodsPublics do not reveal their true preference for public goods.Note: demand in Lindahl’s equilibrium is subjective since it is based on willingness to pay approach of individuals
14 4.6. Efficient Government as a Public Goods (1) The management of government as public goodsAll citizens benefits from a better, more efficient and responsible government.It is difficult and undesirable to exclude any individual from the benefits of a better government
15 4.6. Efficient Government as a Public Goods (2) A politician works for better government gains only a fraction of his effort (?)All citizens benefited from his work, but not all vote to support himAll citizens supporting him benefits as much as other citizens not supporting him (free riders)Thus, efficient government posses both the characters of public goods (namely, non-rival and non-excludable consumption)
16 4.7. ReadingsGruber, Jonathan Public Finance and Public Policy. New York: Worth Publishers. Chapter 7 Stiglitz, Joseph E Economics of the Public Sector. New York, USA: W.W. Northon and Company. Chapter 6.
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