1 Intermediate Microeconomics Public Goods

2 Consider an unregulated world, where a firm has the implicit property rights to the air. Therefore, it is free to pollute. However, if this is inefficient, why doesn’t one person just go and offer to pay firm not to pollute?

3 Public Goods A good is purely public if it is both nonexcludable and nonrival in consumption. Nonexcludable -- all consumers can consume the good. Nonrival -- each consumer can consume all of the good.

4 Public Goods Examples? Broadcast radio and TV programs. National defense. Public highways. Reductions in air pollution. National parks. Clean streets. Safe streets and police services. Without intervention, why might there be an inefficient supply of public goods?

5 Public Goods Consider Al and Bill U A (m A,G) = 16G c A U B (m B,G) = 24G c B Suppose each person has $100 and G costs $4 per unit. How much will each contribute to public good in absence of intervention?

6 Private Provision of Public Goods Since G is a public, how much Al contributes depends on what he thinks Bill will contribute and vice versa. Denote Al’s beliefs regarding Bill’s contribution to be Denote Bill’s beliefs regarding Al’s contribution to be

7 Equilibria in Private Provision of Public Goods So given these reactions functions: what will be Nash Equilibrium?

8 Public Goods and Efficiency Will this be efficient? Consider a tax of $20 on Al and a tax of $60 on Bill, the sum of which will be used to pay for 20 units of the public good. What is intuition?

9 Public Goods and Efficiency What will be efficient amount of Public good?

10 Public Goods and Free-Rider Problem The underprovision of the a Public Good under private provision is also known as the free-rider problem. Since those who don’t pay for Public good can still consume it, people will tend to just let those who value it most supply most of it.

11 Public Goods and Local Public Finance Again, this leaves a role for taxation and government. Tax to provide “efficient” level of public good. Problems? What are “correct” taxes? Since everyone gets to enjoy the same amount of the public good, should everyone pay the same amount for it? Alternatively, since some individuals value that amount of the public good more than others, shouldn’t they pay more?

12 Public Goods and Local Public Finance Suppose there are two types of people: Those like Al (denoted A’s) and those like Bill (denoted B’s) Suppose everyone lives in a neighborhood of 2 people. In each neighborhood, the efficient level of public good is funded by taxing both people.

13 Public Goods and Local Public Finance If tax burden was split equally, would A’s ever want to live with B’s or vice versa?

14 Public Goods and Local Public Finance If tax burden was determined by preferences, would A’s ever want to live with B’s? In particular, B’s value public good more than A’s, So in a “mixed” neighborhood, suppose A’s would pay 40% of total tax burden and B’s pay 60%.

15 Public Goods and Local Public Finance So, from an economics perspective, Public Goods are inherently related to segregation (by income, race, culture, religion, etc.) People want to be around others who similarly value different public goods (school quality, police, neighborhood appearance and character). This implies that issues of racism and classism might be exacerbated by economic concerns, or be outcomes of the economic forces. More importantly though, this analysis shows that if we want to consider policies to increase integration, we have to not only convince people to value diversity, but we have to deal with these public goods issues.