1-1 CHAPTER 4 Public Goods Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

4-2 Characteristics of Goods Excludable vs. Nonexcludable –Excludable – preventing anyone from consuming the good is relatively easy –Nonexcludable – preventing anyone from consuming the good is either very expensive or impossible. Impossible or very costly to confine the benefits of the good only to those who pay for the benefits. Rival vs. Nonrival –Rival – once provided, the additional resource cost of another person consuming the good is positive –Nonrival – once provided, the additional resource cost of another person consuming the good is zero Consumption by one person does not diminish the quantity consumed (and benefits received) by another.

4-3 Some Other Public Goods Basic research Programs to fight poverty ; Income distribution Uncongested non-toll roads Fireworks display Weather Forecasting National Defense Public health measures Air Flood Control / Dam Lighthouse

4-4 Types of Goods EXCLUDABLE RIVAL YESNO YES NO PRIVATE GOODS PUBLIC GOODS COMMON RESOURCES NATURAL MONOPOLY

4-5 Noteworthy Aspects of Public Goods Even though everyone consumes the same quantity of the good, it need not be valued equally by all Classification as a public good is not absolute; it depends on market conditions and the state of technology –impure public good: some rivalry and/or excludable to some extent –Example: TV Broadcasts, Movies, City Streets, Seashore, Restaurant Ratings Private goods are not always provided only by the private sector –publicly provided private goods (rival & excludable) Ex: Medical care (Public provision of a good does not necessarily mean that it is also produced by the public sector, nor that it is a public good) –Example: Garbage Collection; park maintenance –Other examples of goods in which the government hires private companies to do work? –Other reasons why government might offer good or service such as education? Commodity egalitarianism – notion that some commodities ought to be made available to everyone

4-6 Efficient Provision of Private Goods PriceAdam (D f A ) Eve (D f A ) Market (D f A+E ) $1151 $973 $795 $5117 $3139 $11511

4-7 DfADfA DfEDfE D f A+E SfSf $ Quantity of Fig Leaves 4-7

4-8 Efficient Provision of Public Goods Units of Fireworks 1234 Adam (D r A) $300$250$200$150 Eve (D f E ) Market (D f A+E )

4-9 DrADrA Dr E D r A+E Sr Quantity of Fireworks $ 4-9

4-10 Pareto Efficiency – Private Goods Case D f A shows MB f A for Adam D f E shows MB f E for Eve S f shows MC f Necessary condition for Pareto efficiency: MB f A = MB f E = MC f Complete graph on handout! Note the role prices play for Private Goods: as allocation/rationing devices.

4-11 Pareto Efficiency – Public Goods Case D f A shows MB f A for Adam D f E shows MB f E for Eve S f shows MC f Necessary condition for Pareto efficiency: MB f A + MB f E = MC f Complete graph on handout! Note that with Public Goods, prices determine how the costs of financing PG are to be shared. End of Chapter 4 questions (p ): #1, 2a, 2c, 4, 11, 13

4-12 Problems Achieving Efficiency Financing a Public Good –Benefit Theory of taxation: divide taxes according to the MB that taxpayers receive. However: Must know individual demand curve Incentive for taxpayers to lie: no incentive to reveal true demand/preferences for public good. Free Rider problem –Equal Burden taxation: cost divided equally without consideration to benefits –Other methods (think about fund drives for churches, museums, libraries, hospitals, sports facilities, NPR): Guilt, emotion; in memorium; buy a chair/brick

4-13 Free Rider Problem Attempting to avoid bearing the cost of financing a public good. Results from the non-exclusion aspect of PG Failing to reveal true preferences. The larger the group, the more severe is the free rider problem:more likely a public good will not be financed by voluntary contributions. Choosing not to contribute is rational behavior.

4-14 Game Theory Model of Financing Public Good Each contributor will have only a small effect on the decision to provide the PG or not. However, if others feel the same way, PG will not be provided. Therefore: –Need government intervention? –Or, are there some preference revealing strategies Assignment 3

4-15 Experiments and Free-Riding Observations about our game.

4-16 The Privatization Debate Privatization – taking services supplied by government and turning them over to the private sector Public v Private Provision: What is the right mix? –Relative wage and materials costs –Administrative costs –Diversity of tastes

4-17 Free Ride or Reveal Is A better off free-riding or revealing true preferences? Is B better off free-riding or revealing true preferences?