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PUBLIC POLICY Unit - 1.3 Public Goods, Free Riders.

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Presentation on theme: "PUBLIC POLICY Unit - 1.3 Public Goods, Free Riders."— Presentation transcript:

1 PUBLIC POLICY Unit - 1.3 Public Goods, Free Riders

2 PUBLIC GOODS & PUBLICLY PROVIDED PRIVATE GOODS (Reference: Economics of the Public sector Joseph E.Stiglitz 1986 (W.W.Norton & Company New York, London)

3 Issues: What are Public goods? How are they different from conventional private goods? Categorization of public goods? Two criteria: (i)Marginal cost for an additional individual to enjoy such goods is zero (eg, National Defense) (ii)It is difficult (or impossible) to exclude individuals from enjoyment of public good.

4 Pure Public Good Two critical properties: (i)It is not feasible to ration their use. (ii)It is not desirable to ration their use. Rationing is Infeasible: - Goods….(It is infeasible, the good is to be provided publicly) - National Defense - National health program…(polio vaccination or measures that reduce incidence of certain epidemics) - Excluding certain people (eg, exclusion from National park.)

5 Free Rider problem The reluctance of individuals to contribute voluntarily to the support of public goods. Individual has no incentive to pay voluntarily For example, (i)getting polio vaccination - individual incurs cost in terms of time, money, travel, discomfort--- enjoys reduced risk of getting diseases… he gets some benefit. Others get benefit in terms of reduced risk of disease( benefits the entire community) Big social benefit. Those who do not go for vaccination do not feel like paying anything. (ii) This is true of reduced risk for tuberculosis if one takes vaccination. Note that: Even if private cost >private benefit; social benefit>social cost. Because of free rider problem, govt. forces people to pay tax. Contd..

6 Other examples: 1.Fire Insurance in Apartment Building: Fire brigade service is available free to everybody in the building. However, fire insurance for the individual apartment is not free. The building management provides basic amenities as protection against fire from which everybody benefits. Some owners/residents of apartment may be willing to pay for fire insurance, while others may not. The first category of owners/ residents are likely to be more careful about taking precautions against fire; the second group may not so careful. The latter group puts its neighbours (or even the entire building) at risk of fire. Left to themselves, this group would not be willing to pay for insurance for fire. The residents of second group are the ‘free riders’. Some coercion/ compulsion is necessary by the management to make everybody pay for fire insurance. 2.Farm work in joint family: some members think that others will take care of the problem. 3.Eating at home: eating at home is much less expensive than eating in the restaurant.( everybody eats – some people work harder—exclusion is costly) In example 2 & 3 problem is taken care of by family pressure/ sanction. However, in example 1 public coercion is necessary.

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