1. PUBLIC GOODS
Chapter 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
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
1st click – Excludable v Nonexcludable and all sub paragraphs
2nd click – Rival v Nonrival and all sub paragraphs 4

3. Types of Goods PRIVATE GOODS NATURAL MONOPOLY COMMON RESOURCES
EXCLUDABLE
RIVAL
YES NO
PRIVATE GOODS
NATURAL
MONOPOLY
1st click - “Private goods”
2nd click - “Public goods”
3rd click - “Common resources”
4th click - “Natural monopoly”
COMMON RESOURCES
PUBLIC GOODS

4. 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
A commodity can satisfy one part of the definition of a public good but not the other
Impure public good: rival or excludable
Some things that are not conventionally thought of as commodities have public good characteristics
Private goods are not always provided only by the private sector
publicly provided private goods: rival and excludable goods provided by govt
Public provision of a good does not necessarily mean that it is also produced by the public sector (e.g. garbage collection)

5. Some Public Goods Basic research Programs to fight poverty
Uncongested non-toll roads
Fireworks display
Honesty
National Defense

6. Efficient Provision of Private Goods
Price
Adam (DfA)
Eve (DfE)
Market (DfA+E)
$11 5 1 6 $9 7 3 10 $7 9 14 $5 11 18 $3 13 22 $1 15 26

7. DfA+E DfA DfE $ Sf Quantity of Pizza 1st click – Adam’s D curveSf
1st click – Adam’s D curve
2nd click – Eve’s D curve
3rd click – sum of Adam and Eve at P = 11
4th click – sum of Adam and Eve at P = 9
5t click – sum of Adam and Eve at P = 7
6th click – sum of Adam and Eve at P = 5
7th click – sum of Adam and Eve at P = 3
8th clck – sum of Adam and Eve at P = 1
9th click - Market Demand curve and dashed horizontal lines disappear
10th click – Market Supply curve
DfA+E
DfA
DfE
Quantity of Pizza

8. Pareto Efficiency – Private Goods Case
MRSfa = Pf/Pa
Set Pa = $1
MRSfa = Pf
DfA shows MRSfa for Adam
DfE shows MRSfa for Eve
Sf shows MRTfa
Necessary condition for Pareto efficiency: MRSfaAdam = MRSfaEve = MRTfa

9. Efficient Provision of Public Goods
Units of Fireworks 1 2 3 4
Adam (DrA)
$300
$250
$200
$150
Eve (DfE)
250
200
150
100
Market (DfA+E)
$550
$450
$350

10. DrA+E DrA DrE $ Sr Quantity of Fireworks 1st click – Adam’s D curveSr
DrA+E
1st click – Adam’s D curve
2nd click – Eve’s D curve
3rd click – sum of Adam and Eve at Q = 1
4th click – sum of Adam and Eve at Q = 2
5t click – sum of Adam and Eve at Q = 3
6th click – sum of Adam and Eve at Q = 4
7th click - Market Demand curve and dashed horizontal lines disappear
8th click – Market Supply curve
DrA
DrE
Quantity of Fireworks

11. Pareto Efficiency – Public Goods Case
MRSfa = Pf/Pa
Set Pa = $1
MRSfa = Pf
DfA shows MRSfa for Adam
DfE shows MRSfa for Eve
Sf shows MRTfa
Necessary condition for Pareto efficiency: MRSfaAdam + MRSfaEve = MRTfa

12. Problems Achieving Efficiency
The Free-Rider Problem
Solutions to the free-rider problem
Perfect price discrimination
Policy Perspective: GPS is non-rival but excludable since technology exist to scramble signals

13. Laboratory Experiments: Do People Free-Ride?
How a typical experiment works
Typical results
People contribute about 50% of resources to provision of public good
Contributions fall the more often the game is repeated
Cooperation fostered by prior communication
Contribution rates decline when opportunity cost of giving goes up
“Warm-glow” giving

14. The Privatization Debate
Privatization – taking services supplied by government and turning them over to the private sector
Public Sector v Private Sector Provision: What is the right mix?
Relative wage and materials costs: less expensive sector preferred on efficiency grounds
Administrative costs: large fixed adm costs can be spread over a large group under public sector
Diversity of tastes: larger diversity better handled by private sector
Commodity egalitarianism: some commodities ought to be made available to everyone better achieved under public sector

15. Public vs Private Production Debate
Which sector is more efficient?
Theory that public sector managers have little incentive to be efficient
However, problems in comparing cost differences since quality of services offered by public and private sectors can differ. (e.g., hospitals)
Incomplete contracts
Competition to supply good or service
Reputation building
Ultimately depends on Market Environment facing the providers

16. Chapter 4 Summary
Public goods are nonrival and nonexcludable in consumption
Impure public goods exhibit some qualities of private and public goods
Efficient provision of public goods:
∑MRSixy= MRTxy i=person i…..n
An incentive exists to free-ride in the payment of public goods
Public goods can be provided privately; private goods can be provided publicly

17. Appendix: Preference Revelation Mechanisms for Public Goods
∆TEve = MRTra – (MRSraTotal – MRSraEve)
Eve’s choice: ∆TEve = MRSraEve
By substitution: MRTra – (MRSraTotal – MRSraEve) = MRSraEve
Add (MRSraTotal – MRSraEve) to both sides: MRTra = MRSraTotal